The document discusses the importance of financial inclusion in India, highlighting its objectives, delivery methodologies, and the significant role of microfinance in supporting low-income groups. It outlines various initiatives and progress made towards achieving financial inclusion, including the increase in banking outlets, access to credit, and the emergence of technology in finance. Additionally, it addresses challenges and defines key concepts related to microfinance, emphasizing the need for targeted financial services for the underserved population.

1. MODULE 5
NBFC

2. SYLLABUS
Financial inclusion – objectives - Microfinance as a
Development Tool - The Indian Experience -
Evolution and Character of microfinance in India -
Microfinance Delivery Methodologies and models-
Legal and Regulatory Framework- Impact of
Microfinance - Revenue Models of Microfinance-
Profitability, Efficiency and Productivity Emerging
issues

3. ACCORDING TO THE WORLD BANK, AROUND 2
BILLION PEOPLE DON’T USE FORMAL FINANCIAL
SERVICES AND MORE THAN 50% OF ADULTS IN
THE POOREST HOUSEHOLDS ARE UNBANKED.

4. Financial Inclusion
• Financial inclusion may be defined as the process of ensuring
access to financial services and timely and adequate credit where
needed by vulnerable groups such as weaker sections and low
income groups at an affordable cost (The Committee on Financial
Inclusion, Chairman: Dr. C. Rangarajan).
• Financial Inclusion, broadly defined, refers to universal access to a
wide range of financial services at a reasonable cost. These
include not only banking products but also other financial
services such as insurance and equity products (The Committee
on Financial Sector Reforms, Chairman: Dr.Raghuram G. Rajan).

5. Household Access To Financial Services

6. The Essence Of Financial Inclusion
• The essence of financial inclusion is to ensure delivery of
financial services which include –
bank accounts for savings and transactional
purposes,
low cost credit for productive,
personal and
other purposes, financial advisory services,
insurance facilities (life and non-life) etc.

7. Why Financial Inclusion ?
• Financial inclusion broadens the resource base of the financial system by
developing a culture of savings among large segment of rural population
and plays its own role in the process of economic development. Further, by
bringing low income groups within the perimeter of formal banking sector;
financial inclusion protects their financial wealth and other resources in
exigent circumstances. Financial inclusion also mitigates the exploitation of
vulnerable sections by the usurious money lenders by facilitating easy
access to formal credit.
• In rural areas, the Gini’s2 coefficient rose to 0.28 in 2011-12 from 0.26 in
2004-05 and during the same period to an all-time high of 0.37 from 0.35 in
urban areas.

8. Goals Of Financial Inclusion
• Access at a reasonable cost for all households to a full range of financial
services, including savings or deposit services, payment and transfer
services, credit and insurance;
• Sound and safe institutions governed by clear regulation and industry
performance standards;
• Financial and institutional sustainability, to ensure continuity and certainty of
investment; and
• Competition to ensure choice and affordability for clients.

9. FINANCIAL INCLUSION - SCOPE
Financial Inclusion should include access to financial products and services
like,
Bank accounts – check in account
Immediate Credit
Savings products
Remittances & Payment services
Insurance - Healthcare
Mortgage
Financial advisory services
Entrepreneurial credit

10. RBIs vision for 2020 is to open nearly 600 million new
customers’ accounts and service them through a variety of
channels by leveraging on IT.

11. WHAT ARE SOME OTHER MEASURES TAKEN?
• Thanks to use of technology in Finance industry, the void of inaccessibility
to Financial services has been filled.
• Mangalam in Puducherry became the first village in India where all the households were
provided with facilities of Banking.
• General Credit Cards (GCCs) were issued to the poor, low-income group and disadvantaged to
help them access easy credit.
• A 100% Financial Inclusion campaign was launched by commercial banks in different regions.
This resulted in states or UTs like Puducherry, Kerala and Himachal Pradesh announcing a
100% financial inclusion in their districts.
• Many startups were launched to work towards increasing the Financial Inclusion. For instance,
Fintech is working to create mobile payment and micro-lending facilities for financially
underbanked users.
• There are many online payments and mobile payment services to facilitate ease with which
unbanked people can immerse themselves in the digital economy, like AliPay and Paytm, and
foster financial inclusiveness.
• These companies have also come up with innovations to promote transparency in their dealings

12. Progress In Financial Inclusion
• Number of Branches Opened (including
RRBs)
• Villages Covered:
• Total Bank Outlets (including RRBs)
• BSBD Accounts Opened
• Kisan Credit Cards (KCC) Issued:
• General Credit Cards (GCC) Issued:
• ICT Based Accounts - through BCs
• Expansion of ATM Network:
• Financial Literacy Initiatives
• Growth in SHG-Bank Linkage
• Growth of MFIs:
• Bank Credit to MSME
• Insurance Penetration in the Country
• Equity Penetration in the Country
• Financial Inclusion Initiatives – Private
Corporates:
Progress of financial inclusion since the launch of financial inclusion plans clearly
indicates that banks are progressing in areas like opening of banking outlets, deploying
BCs, opening of BSBD accounts, grant of credit through KCCs and GCCs. Detailed trends
are furnished in the following charts.

13. 1. Number Of Branches Opened (Including RRBS)
• Due to RBI’s concerted efforts since 2005, the number of branches of Scheduled
Commercial Banks increased manifold from 68,681 in March 2006 to 1,02,343 in March
2013, spread across length and breadth of the country (Chart 4). ™
• In rural areas, the number of branches increased from 30,572 to 37,953 during March 2006
to March 2013. As compared with rural areas, number of branches in semi-urban areas
increased more rapidly.

14. 2. Villages Covered:
• The number of banking outlets in villages with population more than 2000 as
well as less than 2000 increased consistently since March 2010.

15. 3. Total Bank Outlets (Including Rrbs)
• Total Bank Outlets (including RRBs) ™Total number of banking outlets in villages increased
from 67,694 in March 2010 to 2,68,454 in March 2013 (increased around 4 times during the
period of three years). Of total branches, banking outlets through BCs increased from
34,174 to 2,21,341 during the same period (increased around 6.5 times).

16. 4. BSBD Accounts Opened
• BSBD Accounts Opened ™The number of BSBD accounts opened increased from 73.45
million in March 2010 to 182.06 million in March 2013.
• RBI advised banks to provide small overdrafts in BSBD accounts. Accordingly up to March
2013, 3.95 million BSBD accounts availed OD facility of Rs. 1.55 billion (These figures
respectively, were 0.18 million and 0.10 billion in March 2010).

17. 5. Kisan Credit Cards (KCC) Issued:
• Banks have been advised to issue KCCs to small farmers for meeting their credit
requirements. Up to March 2013, the total number of KCCs issued to farmers remained at
33.79 million with a total outstanding credit of Rs.2622.98 billion (Chart 7).

18. 6. General Credit Cards (GCC) Issued:
• Banks have been advised to introduce General Credit Card facility up to Rs. 25,000/- at
their rural and semi-urban branches. Up to March 2013, banks had provided credit
aggregating to Rs.76.34 billion in 3.63 million GCC accounts

19. 7. ICT Based Accounts - Through Bcs
• In order to provide efficient and cost-effective banking services in the un-banked and
remote corners of the country, RBI directed commercial banks to provide ICT based
banking services – through BCs. These ICT enabled banking services have CBS
connectivity to provide all banking services including deposit and withdrawal of money in
the financially excluded regions. ™
• The number of ICT-based transactions through BCs increased from 26.52 million in March
2010 to 250.46 million in March 2013, while transactions amount increased steadily from
Rs.6.92 billion to Rs.233.88billion during the same period.

20. 8. Expansion Of ATM Network:
• The total number of ATMs in rural India witnessed a CAGR of 30.6% during March 2010 to
March 2013. The number of rural ATMs increased from 5,196 in March 2010 to 11,564 in
March 2013

21. 9. Financial Literacy Initiatives
• Financial education, financial inclusion and financial stability are three elements of an integral strategy,
as shown in the diagram below. While financial inclusion works from supply side of providing access to
various financial services, financial education feeds the demand side by promoting awareness among
the people regarding the needs and benefits of financial services offered by banks and other institutions.
Going forward, these two strategies promote greater financial stability.
• Financial Stability Development Council (FSDC) has explicit mandate to focus on financial inclusion and
financial literacy simultaneously. ™
• RBI has issued revised guidelines on the Financial literacy Centres (FLC) on June 6, 2012, for setting
up FLCs, as detailed in Box 1 above.

22. 10. Growth In SHG-bank Linkage
• This model helps in bringing more people under sustainable development in
a cost effective manner within a short span of time. As on March 2011, there
are around 7.46 million saving linked SHGs with aggregate savings of
Rs.70.16 billion and 1.19 million credit linked SHGs with credit of Rs. 145.57
billion (Source: NABARD, Status of Microfinance in India).

23. 11.Growth Of MFIs:
• Though RBI has adopted the bank-led model for achieving financial
inclusion, certain NBFCs which were supplementing financial inclusion
efforts at the ground level, specializing in micro credit have been recognized
as a separate category of NBFCs as NBFC-MFIs. ™
• At present, around 30 MFIs have been approved by RBI. Their asset size
has progressively increased to reach Rs. 19,000 crore as at end Sept 2013.

24. 12. Bank Credit To MSME
• MSME Sector Which Has Large Employment Potential Of 59.7 Million Persons Over 26.1
Million Enterprises, Is Considered As An Engine For Economic Growth And Promoting
Financial Inclusion In Rural Areas. MSMES Primarily Depend On Bank Credit For Their
Operations. ™
• Bank Credit To MSME Sector Witnessed A CAGR Of 31.4% During The Period March 2006
To March 2012. Of Total Credit To MSME, Public Sector Banks Contributed The Major
Share Of 76%, While Private Sector Banks Accounted For 20.2% And Foreign Banks
Accounted For Only 3.8% As On March 31, 2012

25. 13.Insurance Penetration In The Country
• The total insurance (life and non-life) penetration, in terms of the ratio of insurance premium
as a percentage of GDP increased from 2.32 in 2000-01 to 5.10 in 2010-11. The life
insurance penetration as a percentage of GDP stood at 4.40 in 2010-11 while the non-life
insurance penetration remained at 0.71 during the same period In other words, there is vast
untapped potential as regards insurance penetration.

26. 14. Equity Penetration In The Country
• The number of investor accounts accounted for a meagre 1.71%
of total population of the country

27. 15. Financial Inclusion Initiatives – Private
Corporates:
• A few large private corporate have undertaken projects such as EChoupal/
E- Sagar(ITC), Haryali Kisan Bazaar (DCM), Project Shakti (HUL), etc.
Reportedly, these pioneering projects have brought about vast
improvement in the lives of the participants and set the tone for economic
development in their command areas; which is a pre-requisite for Financial
Inclusion efforts to be undertaken by the banking system.

28. FACTORS AFFECTING ACCESS TO
FINANCIAL SERVICES
• Place of living
• Absence of legal identity and gender biasness
• Limited knowledge of financial services
• Level of income and bank charges
• Rigid terms and conditions
• Type of business

29. Bank group as well as population wise growth trend of
number of bank branches over the India
• shows the Bank group as well as population wise growth trend of number of bank branches
over the India as on 31st December 2014. It is clear from the graph that SBI and its
associates, public sector and regional rural banks are operates more in rural areas
compared to others. The overall growth in rural and semi urban areas is comparatively
more compared to urban and metropolitan. The private sector banks dominate in semi-
urban areas with 6155 bank branches whereas foreign banks dominate in metropolitan
area. The total number of functioning bank branches are122, 294 across the country.

30. GDP-BANK BRANCHES-ATM-CREDIT TRENDS

31. FINANCIAL INCLUSION – STEPS TAKEN
Co-operative Movement
Setting up of State Bank of India
Nationalisation of banks
Lead Bank Scheme
RRBs (Regional Rural Banks)
Service Area Approach
Self Help Groups

32. Financial Inclusion – Why Have We Failed?
Absence of Technology
Absence of reach and coverage
Delivery Mechanism
Not having a Business model
Rich have no compassion for poor

33. Why Are We Talking Of Financial Inclusion Now?
Focus on Inclusive Growth
Banking Technology has arrived
Realisation that Poor is bankable

34. What Are RBI ‘S Contribution
No-Frill Accounts
Overdraft in Saving Bank Accounts
BC Model
KCC Guidelines
Liberalised branch expansion
Liberalised policy for ATM
Introducing technology products and services
Pre-Paid cards, Mobile Banking etc.
Allowing RRBs’ / Co-operative banks to sell Insurance and Financial Products
Financial Literacy Program
Creation of Special Funds
431 districts identified by the SLBC for 100 per cent financial inclusion across various
States/UTs and the target in 204 districts of 21 States and 7 UTs has reportedly been

35. What Have We Achieved
Number of No-Frill Accounts – 28.23 million
Number of rural bank branches – 31,727 constituting 39.7% of total bank
branches
Number of ATMs – 44,857
Number of POS – 4,70,237
Number of Cards – 167.09 million
Number of Kisan Credit cards – 76 million
Number of Mobile phones–403 million – out of which 187 million (46%) do
not have a bank account

36. PROBLEMS / DIFFICULTIES
Scaling up of activities
Transaction cost too high
Appropriate business model yet to evolve
BC model too restrictive
Limitation of cash delivery points
Lack of Interest / Involvement of Big Technology Players

37. MICROFINANCE

39. MICROFINANCE
• Microfinance is the provision of financial services to low-income, poor and very poor self-
employed people (Otero, 2000). Robinson (2001) as cited in Ogunleye (2009) defined
microfinance as small scale financial services that involve mainly savings and credit
services to the poor. (Samson Alalade Y., Olubunmi Amusa B., Adekunle Olusegun A. 2013)

40. MICROFINANCE
• According to Patrick Meagher, microfinance is defined as ‘lending small amounts of
money for short periods with frequent repayments’ (Meagher 2002:7). However, this
definition equates the concept with micro-credit, which is rather a part of microfinance
service. For Van Maanen, ‘microfinance is banking the unbankables, bringing credit,
savings and other essential financial services within the reach of millions of people who
are too poor to be served by regular banks, in most cases because they are unable to
offer sufficient collateral’ (Maanen 2004:17). In broader understanding, Ledger wood
conceived that financial services generally include savings and credit; however, some
MFIs also provide credit cards, payment services, money transfers, and insurance
services. Besides, many MFIs undertake social intermediation services such as group
formation, development of self-confidence, and training in financial literacy and
management capabilities among members of a group. Thus, the concept of
microfinance often includes both financial and social intermediations (Ledger wood
1999: 1)

41. Contd..
• 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 Microfinance is a term used to refer to the activity of provision of
financial services to Clients who are excluded from the traditional system on
account of their lower economic status. The financial services will most
commonly take the form of loan and savings by removing collateral
requirement and creating banking system which is based on mutual trust.

42. • According to Consultative Group to Assist the Poor (CGAP)’s
homepage, microfinance’s definition is: “Microfinance offers poor
people access to basic financial services such as loans, savings,
money transfer services and microinsurance”

43. DEFINITION OF MICROFINANCE INSTITUTIONS
• The proposed Microfinance Services Regulation Bill of India1 defines
microfinance services as “providing financial assistance to an individual or
an eligible client, either directly 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.”

44. The bill further defines Micro Finance Institution as “an organization or
association of individuals including the following if it is established for the
purpose of carrying 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 :

45. Characteristics Of Microfinance
Microfinance services are aimed at the poor Microfinance services are
aimed at the poor clients, who do not have access to formal
financialclients, who do not have access to formal financialsources.
Microfinance has its uniquesources. Microfinance has its
uniquecharacteristics, which are as follows:characteristics, which are as
follows:
• Mostly it is collateral freeMostly it is collateral free
• MFIs go to clients rather than clients going toMFIs go to clients rather th
an clients going toMFIsMFIs
• Simplified savings and loan proceduresSimplified savings and loan
procedures
• Small size of loans and savingsSmall size of loans and savings

46. Contd…
• Loan size increases in the repeated loans or Loan size increases in the
repeated loans or subsequent cyclessubsequent cycles
• Interest rate is usually in between moneyInterest rate is usually in
between moneylenders and formal bankslenders and formal banks
• Free use of loans (no restrictions on specifiedFree use of loans (no
restrictions on specifiedpurpose)purpose)
• Repayment considers incomes from business asRepayment considers
incomes from business aswell as other sourceswell as other sources
• Loan and savings products within manageableLoan and savings
products within manageablenumbers.numbers

47. KEY PRINCIPLES OF MICRO FINANCE
1. Poor people need a variety of financial services, not just loans.
2. Microfinance is a powerful tool to fight poverty.
3. Microfinance means building financial systems that serve the poor.
4. Microfinance ca n pays for itself, and must do so if it is to reach very large numbers of poor
people.
5. Microfinance is about building permanent local financial institutions that can
attract domestic deposits, recycle them into loans, and provide other financial services.
6. Microcredit is not always the answer. Other kind of support may work.
7. Interest rate ceilings hurt people by making it harder for them to get
8. The job of government is to enable financial services, not to provide them directly.
9. Donor funds should complement private capital, not compete with it.
10. The key bottleneck is the shortage of strong institutions and managers.
11. Microfinance works best when it measures and discloses its performance.

48. OBJECTIVES OF MICROFINANCE
The organizations working to promote microfinance institutions in different parts of the world
determine various objectives to microfinance. The important among them are listed as
follows.
1. Promote socio-economic development at the grass root level through community-based
approach
2. Develop and strengthen people’s groups called Self-Help Groups and facilitate sustainable
development through them
3. Provide livelihood training to disadvantaged population.
4. Promote activities which have community participation and sharing of responsibilities
5. Promote programs for the disabled
6. Empower and mainstream women
7. Promote sustainable agriculture and ecologically sound management of natural resources
8. Organize and coordinate networking of grass root level organization
9. Get benefits by reducing expenditure and making use of local resources as inputs for
livelihood activities
10. Increase the number of wage days and income at household level

49. THE ESSENTIAL FEATURES OF CREDIT FOR
MICROFINANCE WHICH HAVE EVOLVED ARE
AS UNDER : -
• The borrowers are low-income groups.
• The loans are for small amounts.
• The loans are without collateral.
• The loans are generally taken for income-generating activities, although
loans are also provided for consumption, housing and other purposes.
• The tenure of the loans is short.
• The frequency of repayments is greater than for traditional commercial
loans.

51. MAJOR MODELS OF MICROFINANCE INITIATIVES
• The literature on microfinance listed 12 various models of microfinance
institutions working in different countries. This classification is on the basis
of regulatory structure and operational methods. Few models are not
common in international level and few others are complimentary. NGOs and
self help groups are example. Most of the self help groups have a promoter
NGO. At the same time many NGOs have direct microfinance chains. Like
that commercial banks are implementing microfinance operations through
its SHGs. In these cases two models are working together to serve poor.
Some models are working in the informal sector only. Major models are
grameen, village bank; credit union, co operatives, self help groups,
commercial banks, NBFCs, Association of persons, nidhi model, community
banking, NGOs and ROSCAs.

52. MICRO FINANCE MODELS IN INDIA
1) Grameen model
2) SHG model
3) Federated SHG model
4) Cooperative Model
5) ROSCA s
6) Micro-finance companies (MFCs)

53. Impact Of Microfinance
 Financial inclusion
 SHARE, SKS and Spandana serve more than 1.5 million families,
most of them very poor when they started accessing micro-financial
services
MFI’s achieved an overall growth of customer base by 10.8%
Borrowing base increased from 83.6 to93.9 million
Increase of personal income
Empowerment of women
Improvement in nutrition
Increased education of the borrower’s children
Pressure on banking institutions to improve

54. Recommendations
• Improve Governance.
• Change our mindset and think microfinance as an
huge business opportunity with high social impact.
• Learn from the past experience and from
neighbouring countries.

55. CREDIT DELIVERY METHODOLOGIES USED
BY MICROFINANCE INSTITUTIONS
MFI’s use two basic methods in delivering financial services to
their clients.
These are:
(!) Group Method and
(2) Individual method

56. Group Method
This is one of the most common methodologies for providing micro-finance. Group method
primarily involves a group of individuals, which becomes the basic unit of operation for the
MFIs. As we have discussed earlier, MFIs have to provide collateral free loans, group
methodologies help in creating social collateral (peer pressure) that can effectively
substitute physical collateral. Group becomes a basic unit with which MFIs deal. The
advantage of group methodology is that
• Groups are trained to own joint responsibility for loans that are taken by individuals in the
group.
• Groups ensure repayments from all individuals in that group and incase of a default
• Groups functions as the forum where the credit discipline and other related issues are
discussed.
• Group may have to jointly own the responsibility of defaults and pay on behalf of
defaulting client.
• Group also help credit appraisal and provide opinion on creditworthiness of each
individual in the group.
• Groups methodology also helps in controlling cost

57. Contd..
• MFIs actually deliver the financial service at the client’s location which could
be a village in rural areas or a colony/slum in urban area. Having a group
helps the MFIs in getting all clients at one spot rather than visiting each
individual’s house. This helps the MFI in increasing the efficiency of staff
and controlling the cost. Group methodology creates a forum where
individuals come and discuss, can provide opinion, and exert social
pressure.
• The advantage of Group methodology can easily be appreciated by the fact
if the a MFI employee has to visit each individual house in isolation, it would
be very difficult. Also in the absence of a group, if a client refuses to pay
there is no forum where such a case can be discussed or there is no
method through which the MFI can expert pressure on the client.

58. Contd…
• Group methodology is also important because in case of larger loan defaults
a financial institutions can take recourse o legal action but in small loans
legal recourse is not an economically sound option. An MFI who may have
an outstanding or Rs 3,000 at default cannot apply legal pressure as the
cost of recovery through that method can be higher than the amount to be
recovered itself.
• Moreover, the clients that the MFIs are dealing with are generally poor and
may face genuine problems at times. Rather than taking an aggressive/legal
approach, which such vulnerable clients it is always better to have more
constructive and collective approach, which is provided by the Groups.
• Due to the various advantages, as indicated above provided by groups, this
methodology is widely accepted and used in micro-finance across the world.

59. SELF-HELP GROUP AND JOINT LIABILITY GROUPS
(GRAMEEN MODEL AND ITS VARIANTS) ARE TWO
COMMON CREDIT DELIVERY MODELS IN INDIA.

60. SELF –HELP GROUPS (SHGS)
• Self-help Group concept has its origin in India. SHGs are now considered to
be very important bodies in rural development and are therefore found in
almost all parts of the country and their number is still rapidly growing.
SHGs are formed by Non-Government Organisations as well as
Government agencies and are used as channels for various development
programmes.
• A Self-Help Group is an association of generally up to 20 members (not
exceeding 20 members), preferably from the same socio-economic
background. SHGs are facilitated by Government agencies or NGOs for
members to come together for discussing and solving their common
problems either financial or social through mutual help. An SHG can be all-
women group, all-men group, or even a mixed Group. However, it has been
the experience that women’s groups perform better in all the important
activities of SHGs. Mixed group is not preferred in many of the places, due

61. SOME OF THE DISTINCT FEATURES OF SHGS ARE;
(i) Recognized by government: SHGs are well recognized and accepted by government, SHGs can open
bank accounts in the name of SHG. They can also receive government grants and funds for development
activities.
(ii) SHGs are social intermediaries: SHGs do not restrict their functions only to financial transactions. SHGs
are often involved in many social activities. There are example where SHGs have taken up social issues
and fought against social evils like alcoholism, violence, against women, dowry, getting into village politics
and being elected as Sarpanch.
(iii) Books of accounts: SHGs maintain their own books of accounts. These are simple books to keep records
of their savings, loans income and expenditures. Strong SHGs also make their Balance sheets and Income
statements.
(iv) Have office bearers: SHGs gave a structure where there is a Group President, Secretary and Treasure.
They are elected by the group.
(v) SHGs are more autonomous as they decide their own rules and regulations.
(vi) SHGs mobilize thrift and rotate it internally.
(vii) SHGs can hold bank account and can also borrow from banks and other financial institutions.
We see that SHGs are groups, which are more autonomous. While they are involved in financial transactions,
their role is not just restricted to it. SHGs are also involved in various social issues.
As more SHGs are formed they have started federating themselves into clusters and clusters in turn as SHG
Federations. The Federations are able to channelise funds to the SHGs and also help in improving the
managing and financial skills of SHGs.

62. Joint Liability Group – Grameen Model
• Grameen model is based on the concept of joint liability. It is the brainchild of Prof..
Muhammad Yunus, founder of Grameen Bank in Bangladesh. Grameen model is the most
accepted and prevalent micro-finance delivery model in the world today. Many MFIs have
accepted the model as it has high focus on standardization and discipline
• Grameen model, as mentioned, is a joint liability group model. Here five-member groups
are formed and eight such groups form a Center. Hence, in a full-capacity Center there are
40 members (8 x 5). However, over the years people have experimented with Centers of
different sizes and now there are variations of 5-8 groups within a Center. Center is the
operational unit for the MFI, which means that MFI deals with a Center as a whole.
• Meetings also take place only at the Central level and individual groups do not meet. Group
meetings take place only in front of the Field staff of the MFI. A Grameen model is focused
on financial transactions and other social issues are generally not discussed. The Group
and Center are Joint liability Groups, which means that all members are jointly responsible
(‘liable’) for the repayment. MFI recovers full money from Center, if any member has
defaulted: the group members have to pool in money to repay to the MFI. If Group
members are unable to do it, Center as whole has to contribute and share the responsibility.

63. Some Other Features Of Grammen Model Are:
• (i) The group meeting take place every week
(ii) Interest rate are charged on flat basis
(iii) MFI staff conducts the meeting
(iv) All transactions take place only in Center meetings
• Grameen model is focused on providing financial services to the clients and hence there is
an emphasis on standardization and discipline. The model suggests weekly meeting for
frequent interaction with the clients to reduce credit risk. The meetings are conducted for
carrying out the financial transactions only. The meetings are conducted systematically in a
short-time and other social issues are not discussed. Flat interest is charged again for
making the system standardized. In flat rate system installment size of repayment remains
small for all weeks and hence is convenient and easier to explain. Also, it is easy to break
the loan installment into the principal and interest component.
• We see that the SHG and Grameen model have originated with two different approaches.
SHG model has been developed with holistic view of development and empowerment of
society where financial transactions are only one part of it. While Grameen model is
specifically focused on providing financial services to the low-income clients. A broad
comparison of the two models is presented in the Table 1.

64. Joint Liability Groups (JLG)
• Grameen model is a particular form of joint liability Group but in India there are other
forms of Joint liability Groups as well. MFIs, particularly in urban areas, form JLGs of
five-members. These are group of individuals coming together to borrow from the
financial institution. They share responsibility (“liability”) and stand as guarantee for
each other. There is a Group Leader in such JLGs, many MFIs prefer such group in
urban business areas. Such JLGs do not hold periodic meetings.
• Typically members are shopkeepers from same locality. These forms of JLGs are
somewhere between Group and Individual lending methods. While lending in such
JLGs is to individual members small JLGs still provide some sort of comfort to the
MFIs. Also collection can be done from a single point, generally from the Group leader
rather than going to each individual. As in urban areas shopkeepers do not have time
to hold meeting, these JLGs do not meet.

65. Individual Method
• So far we have discussed the Group based lending method. However MFIs are also
increasingly providing loans to individuals. In Individual lending method, MFIs provide
loans to an individual based on his/her own personal credit worthiness. Individual
lending is more prevalent with clients who generally need bigger size loans and have
the capacity to produce guarantee and generate enough comfort to the MFI. MFIs
generally base their decision on personal knowledge of the client, his/her reputation
among peers and society, client’s income sources and business position. MFIs also
ask for individual guarantors or take post-dated cheques from clients.
• Individual guarantors come from friends or relatives well known to the borrower and
who are ready to take liability of repaying the loan, should the borrower fail to do so. If
the loan is significantly larger, then MFIs may also take some collateral security.

68. REGULATORY STRUCTURE OF
MICROFINANCE IN INDIA
As we mentioned earlier India has no uniform structured law to regulate microfinance
institutions. Different forms of organisations are depends on various existing regulatory
frameworks for the functioning. All microfinance institutions aim social and economic
upliftment of beneficiaries. But there are different forms of institutions are functioning to
attain the same. They are broadly classified in to non profit institutions, mutual benefit
institutions and for profit institutions10. The goal of non profit institutions are only the
financial and social empowerment of the beneficiary class. Such ventures are
registering in different formats including as society under societies registration act of
1860, Charitable trusts under trust act and as section 25 company. Mutual benefit
institutions are working only for the benefit of its members. Those are registered under
co operative which can be just a savings and credit co operative or be further licensed
as co operative bank, mutual benefit trust, under chitties act and mutual benefit section
620 nidhi companies. For profit entity may be registered as association of persons,
investment trusts and company which is further either an NBFC or a bank.

69. Regulatory structure of microfinance in india- contd
There are mainly three channels for the regulation of microfinance institutions.
NBFCs are registered under Reserve Bank of India. Further co operative
institutions are registered under concerned state co operative society’s act
and multi state co operative society under central government. Non profit
entities are registered under societies or trust acts under the concerned
state. Company under Indian companies act 1956 also possible for mutual
benefit and profit based undertakings.
NGO-MFIs are non-profit MFIs left almost entirely unregulated and registered
mainly under societies act or trust act. The major NGO-MFI sample includes
All Backward Class Relief & Development Mission, Bharat Integrated Social
Welfare Agency (BISWA), Cashpor Micro Credit, Evangelical Social Action
Forum (ESAF) and Indian Association for Savings and Credit (IASC).

70. REGULATIONS TO BE SPECIFIED
1. A study of 9 large and 2 small NBFC-MFIs shows that loans constitute an average of 95% of
total assets (excluding cash and bank balances and money market instruments). We may,
therefore, accept that a NBFC pre-dominantly provides financial services to the Microfinance
sector if its loans to the sector constitute not less than 90% of its total assets (excluding cash
and bank balances and money market instruments). It is also necessary to specify that a NBFC
which is not a NBFC-MFI shall not be permitted to have loans to the Microfinance sector which
exceed 10% of its total assets.
2. Most MFIs consider a low-income borrower as a borrower who belongs to a household whose
annual income does not exceed `50,000/-. This is a reasonable definition and can be accepted.
3 a) Currently, most MFIs give individual loans which are between `10,000 and `15,000. However,
some large NBFCs also give larger loans, even in excess of `50,000 for special purposes like
micro-enterprises, housing and education.
b) It is important to restrict the size of individual loans as larger loans can lead to over-borrowing,
diversion of funds and size of repayment installments which are beyond the repayment capacity
of the borrower.
c) It is, therefore, suggested that the size of an individual loan should be restricted to `25,000.
Further, to prevent over-borrowing, the aggregate value of all outstanding loans of an individual
borrower should also be restricted to `25,000.

71. CONTD…
4 a) MFIs normally give loans which are repayable within 12 months irrespective of the
amount of the loan. However, the larger the loan, the larger the amount of the repayment
installment, and a large installment may strain the repayment capacity of the borrower and
result in ever greening or multiple borrowing. At the same time, if the repayment installment
is too small, it would leave cash with the borrower which could be directed to other uses
and not be available for repayment when repayment is due.
b) There has, therefore, to be a linkage between the amount of the loan and the tenure of the
loan. It is, therefore, suggested that for loans not exceeding `15,000, the tenure of the loan
should not be less than 12 months and for other loans the tenure should not be less than 24
months. The borrower should however have the right of prepayment in all cases without
attracting penalty.
5 a) Low-income borrowers often do not have assets which they can offer as collateral, and it
is important to ensure that in the event of default, the borrower does not lose possession of
assets which s/he may need for her/his continued existence.
b) It is, therefore, suggested that all loans should be without collateral.

72. Contd..
6 a) It is often argued that loans should not be restricted to income generating activities but should also be
given for other purposes such as repayment of high-cost loans to moneylenders, education, medical
expenses, consumption smoothing, acquisition of household assets, housing, emergencies, etc. A recent
study by Centre for Microfinance of borrowers in Hyderabad indicates that Microfinance is useful in
smoothening consumption and relieving seasonal liquidity crises that visit poor families and that it obviates
the need for high-cost borrowing from informal sources.
b) The need for loans for the above purposes cannot be denied. At the same time there are powerful
arguments why loans by NBFC-MFIs should be confined to income-generating activities.
Firstly, the main objective of NBFC-MFIs should be to enable borrowers, particularly women to work their
way out of poverty by undertaking activities which generate additional income. This additional income,
after repayment of the loan and interest, should provide a surplus which can augment the household
income, enable consumption smoothing and reduce dependence on the moneylender.
Secondly, if the loans are not used for repayment of high-cost borrowing, but are used for consumption,
they will in fact add to the financial burden of the household as there will be no additional source from
which the loan and interest thereon can be repaid.
Thirdly, borrowing for non-income generating purposes may tempt borrowers to borrow in excess of their
their repayment capacity.
Finally, if there is no identified source from which interest and installment can be paid, the rate of
delinquency will increase. This additional cost will push interest rates upwards and may even result in

73. CONTD..
c) Therefore, a balance has to be struck between the benefits of restricting loans only for
income-generating purposes and recognition of the needs of low-income groups for loans
for other purposes.
d) According to “Access to Finance in Andhra Pradesh, 2010, CMF/IFMR, Chennai” the usage
of loans given by JLGs and SHGs is as under :
e) We would however suggest that not more than 25% of the loans granted by MFIs should
be for non-income generating purposes.

74. Contd…
7 a) Currently, some MFIs recover loans by weekly installments while other MFIs recover loans by monthly
installments. The rules made under the Ordinance issued by the Andhra Pradesh Government specify that
recovery should be made only by monthly installments.
b) In a representation made by the Government of Andhra Pradesh to the Sub- Committee it has been argued
that borrowers often have uncertain levels of income flows and they are put to great hardship to mobilize,
accumulate and service a weekly repayment commitment. It has also been stated by some MFIs that they
are able to reduce costs by moving from a weekly system of repayment to a monthly system of repayment.
c) On the other hand, others have argued that some income-generating activities provide a constant flow of
cash and leaving idle cash in the hands of borrowers increases the risk that the cash may be diverted to
purposes other than repayment of loans. A weekly repayment schedule also means that the effective
interest can be reduced. However, N. Srinivasan in the 2010 Microfinance India Report argues that there is
enough evidence to suggest that repayment rates do not materially suffer if the repayments are set at
fortnightly or monthly intervals.
d) In our opinion, each purpose for which a loan is used would generate its own pattern of cash flows.
Therefore, the repayment pattern should not be rigid but should be so designed as to be most suitable to
the borrower’s circumstances. We would, therefore, suggest that while MFIs should be encouraged to move
to a monthly repayment model, freedom should be given to the MFI to fix a pattern of repayment which can
be weekly, fortnightly or monthly depending upon the nature of the loan. The choice of a weekly, fortnightly
or monthly repayment schedule should be left to the borrower to suit his/her individual circumstances.

75. Contd…
8. We have observed that some MFIs operate not merely as providers of credit but also
provide other services to the borrowers and others. These services include acting as
insurance agents, acting as agents for the suppliers of mobile phones and telecom
services, acting as agents for the sale of household products, providing agricultural
advisory services etc. While these service can profitably be provided by MFIs along with the
supply of credit, there is a risk that given the vulnerable nature of the borrower and his/her
inadequate negotiating power, an element of compulsion may creep in unless the provision
of these services is regulated. It is, therefore, necessary that the regulator limit the nature of
services which can be provided, as also the income which can be generated from such
services, the latter as a percentage of the total income of the MFIs.

78. CHALLENGES FACED BY MICRO FINANCE
There are over 10,000 microfinance institutions serving in excess of 150m customers,
100m of them being the poorest families. Microfinance is gathering momentum to
become a significant force in India. Some challenges faced by micro finance in India
are:
• Financial illiteracy: One the major challenge in India towards the growth of the
microfinance sector i.e. illiteracy of the people. This makes it difficult in creating
awareness of microfinance and even more difficult to serve them as microfinance
clients.
• Lack of information There are various sources of credit information in India, but none
of these focuses on small, rural borrowers. Credit information on such borrowers is
difficult to obtain because the majority of the rural poor rely on moneylenders and
other informal lenders, and it is not in the interest of such lenders to pass on a
borrower’s good credit repayment record to other providers of finance.
• Inability to generate funds: MFIs have inability to raise sufficient fund in the
microfinance sector which is again an important concerning challenge. Through
NBFCs are able to raise funds through private equity investment because of the for
profit motive, such MFIs are restricted from taking public deposits

79. CONTD….
• Heavy dependence on banks & FIS: MIF’s are dependent on borrowing from banks & FIS.
For most of the MFI’s funding sources are restricted to private banks & apex MFI’s. In
these available banks funds are typically short term i.e. maximum 2 years period. Also
there is a tendency among some lending banks to sanction and disburse loans to MFI,s
around the end of the accounting year in pursuit of their targets.
• Weak governance: Many MFI’s are not willing to convert to a corporate structure; hence
they trend to remain closed to transparency and improved governance, thus unable to
attract capital. MFI’s also facing a challenge to strike a balance between social and
business goals. Managements need to adapt business models based on changing
scenarios & increased transparency; this will enable attracting capital infusion and
private equity funds.
• Interest Rate: MFIs are charging very high interest rates, which the poor find difficult to
pay. MFIs are private institutions and therefore require being economically sustainable.
They do not get any subsidized credit for their lending activities and that is why they
need to recover their operational costs from borrowers
• Regional Imbalances: There is unequal geographical growth of Microfinance institutions
and SHGs in India. About 60% of the total SHG credit linkages in the country are
concentrated in the Southern States. However, in States which have a larger share of the
poor, the coverage is comparatively low. Main reason for this is the state government
support, NGO concentration and public awareness

80. Other Issues
Risk of failure to pay
 Lack of information
 Weak regulatory framework
 Lack of elastic services and products
 Interest Rate
 Education Level
 Improper usage of Loan
 Language difficulty
 Lack of Insurance Services
 Lack of access to Funding

81. • Risk of failure to pay :- There is uncertainty regarding the lending to economically
weaker section of society. The rural poor have irregularity/volatility in income
streams and expenditure patterns, and there is possibility of systemic risks such as
crop failures or a fall in commodity prices, and therefore, may face real difficulties
servicing loans. So banks have genuine concerns while dealing with the rural poor,
and tend to identify such loans as risky.
• Lack of information :- There is uncertainty regarding the lending to economically
weaker section of society. The rural poor have irregularity/volatility in income
streams and expenditure patterns, and there is possibility of systemic risks such as
crop failures or a fall in commodity prices, and therefore, may face real difficulties
servicing loans. So banks have genuine concerns while dealing with the rural poor,
and tend to identify such loans as risky.

82. • Weak regulatory framework :- Government has not been able to develop
and enforce a legal and regulatory framework conducive to rural
finance, so that contract design, contract renegotiation, and contract
enforcement remain weak, making it even more difficult for financiers
to provide borrowers with the right incentives for repayment
• Lack of elastic services and products:- Rural banks do not provide
flexible products and services to meet the income and expenditure
patterns of small rural borrowers. As noted above, small rural borrowers
have irregular/volatile income streams and expenditure needs, and
therefore, prefer to borrow frequently, and repay in small installments,
but most banks do not offer such products.

83. • Interest Rate:- MFIs are charging very high interest rates, which the poor
find difficult to pay. MFIs are private institutions and therefore require being
economically sustainable. They do not get any subsidized credit for their
lending activities and that is why they need to recover their operational costs
from borrowers.
• Education Level:- The level of education of the clients is low. So it creates a
problem in the growth and expansion of the organization because its
percentage is around 70% in MFIs. Target population of MFIs is people of
rural areas and they have no or less education level. As the percentage of
people who have very less education

84. • Improper usage of Loan:- Loan raised through microfinance is mainly used for consumption
purpose not for productive purpose. It does not serve the real purpose of Micro-credit
• Language difficulty:- Language barrier makes communication with the clients (verbal and
written) is an issue that creates a problem in growth and expansion of the organization
because around 54% language barrier has been identified in MFIs. As the education level
of clients is low so it is difficult to communicate with them .For this reason it is also difficult
for the MFIs employees to make the clients to understand the policy and related details.

85. • Lack of Insurance Services:- Another factor contributing to the lack of growth in MFIs is that
requisite financial support has not been provided to MFIs by concerned agencies. Around
68% of MFIs response was in favour of that government don’t support them to meet the
funds requirement as MFIs cannot alone remove the poverty from the country.
• Lack of access to Funding:- Poor people are exposed to monetary shocks but, the current
Microfinance programme in India is just focused on regular saving and micro-credit.
However, some of the MFIs have started providing insurance services but the efforts are
still at an experimental stage.

86. PROFITABILITY EFFICIENCY AND
PRODUCTIVITY

87. EFFICIENCY AND PRODUCTIVITY
Efficiency and productivity indicators are performance measures
that show how well the institution is streamlining its operations.
Productivity indicators reflect the amount of output per unit of
input, while efficiency indicators also take into account the cost of
the inputs and/or the price of outputs. Since these indicators are
not easily manipulated by management decisions, they are more
readily comparable across institutions than, say, profitability
indicators such as return on equity and assets. On the other
hand, productivity and efficiency measures are less
comprehensive indicators of performance than those of
profitability.

88. Microfinance institutions have much lower rates of efficiency than commercial
banks because on a dollar per dollar basis microcredit is highly labor
intensive: a hundred-dollar loan requires about as much administrative effort
as a loan a thousand times larger. In an MFI, administrative costs may be
$15, $20, or even $30 for each $100 in the loan portfolio, so the efficiency
ratio is 15%, 20% or 30%, whereas in a commercial bank efficiency ratios of
1.5%, 2% or 3% are common. Economies of scale have much less impact
on efficiency in MFIs than is usually believed because of the high variable
costs of the microcredit technology. If the loan portfolio of an MFI exceeds
$2 to $3 million, growth does not seem to bring significant efficiency gains
and small MFIs can often be more efficient than their much larger peers.
This publication includes four indicators to measure productivity and
efficiency: Operating Expenses, Cost per Borrower, Personnel Productivity

89. PROFITABILITY
• Profitability measures, such as return on equity and return on assets, tend
to summarize performance in all areas of the company. If portfolio quality is
poor or efficiency is low, this will be reflected in profitability. Because they
are an aggregate of so many factors, profitability indicators can be difficult to
interpret. The fact that an MFI has a high return on equity says little about
why that is so. All performance indicators tend to be of limited use (in fact,
they can be outright misleading) if looked at in isolation and this is
particularly the case for profitability indicators. To understand how an
institution achieves its profits (or losses), the analysis also has to take into
account other indicators that illuminate the operational performance of the
institution, such as operational efficiency and portfolio quality. The
profitability analysis is further complicated by the fact that a significant
number of microfinance institutions still receive grants and subsidized loans.
“Comparing apples with apples” is always a problem in microfinance,

90. CONTD…
• Creative accounting can have an astonishing impact on profits. Normally,
external auditors, tax authorities and banking regulators tend to set limits on
this sort of creativity, but microfinance is not yet a normal industry. External
auditors have, on the whole, been slow to adapt to microfinance, few MFIs
are subject to taxation, and even fewer fall under the authority of banking
supervisors. This means that more than the usual amount of care is needed
for the analysis of microfinance institutions. A simple example will illustrate
this. Banks usually don’t have much latitude in setting their loan loss
provisions. Regulators and tax authorities will tell them what to do, and
auditors will watch that they do it. At this point however, relatively few MFIs
are regulated financial institutions and, for those who aren’t, it would be
easy to achieve a dramatic change in their profitability through the simple
expedient of adjusting the level of loan loss provisions. An analyst who
focuses exclusively on profitability would have no way of detecting this.

91. CONTD…
• Finally, this guide has grouped portfolio yield among the profitability
indicators, not because the cost of credit to the clients measures profitability
per se, but because profitability is often a function of how much MFIs charge
their clients. Other financial institutions are limited by competition as to how
much they can charge, but microfinance is still such a new activity that
many MFIs operate in a seller’s market. In the absence of competition, even
highly inefficient MFIs can remain profitable by simply raising their rates. On
the other hand, in a fiercely competitive market like Bolivia even very
efficient MFIs find it difficult to achieve high portfolio yields. This publication
includes three indicators to measure profitability: Return on Equity, Return
on Assets and Portfolio Yield. As mentioned earlier, return on equity and
return on assets have been adjusted for subsidies and varying accounting
practices in order to make the results comparable across institutions.