Hardik savla micro finance

“MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
EXECUTIVE SUMMARY
Microfinance is defined as any activity that includes the provision of financial services such
as credit, savings, and insurance to low income individuals which fall just above the
nationally defined poverty line, and poor individuals which fall below that poverty line, with
the goal of creating social value. The creation of social value includes poverty alleviation and
the broader impact of improving livelihood opportunities through the provision of capital for
micro enterprise, and insurance and savings for risk mitigation and consumption smoothing.
A large variety of actors provide microfinance in India, using a range of microfinance
delivery methods. Since the ICICI Bank in India, various actors have endeavored to provide
access to financial services to the poor in creative ways. Governments also have piloted
national programs, NGOs have undertaken the activity of raising donor funds for on-lending,
and some banks have partnered with public organizations or made small inroads themselves
in providing such services. This has resulted in a rather broad definition of microfinance as
any activity that targets poor and low-income individuals for the provision of financial
services. The range of activities undertaken in microfinance include group lending, individual
lending, the provision of savings and insurance, capacity building, and agricultural business
development services. Whatever the form of activity however, the overarching goal that
unifies all actors in the provision of microfinance is the creation of social value.

Department of Management Studies, Shah and Anchor Kutchhi Engineering College,
Chembur, Mumbai
Page 1

OBJECTIVES OF PROJECT

 Microfinance Regulation in India.
 Micro Finance Model.
 Microfinance Management, Critical Analysis.
 The History of Modern Microfinance. I learnt in detail the process of Micro Finance,
from its need at the grass root level.
 Functioning of various Govt:, Semi Govt: & various other delivery channels.
 Learning of how SHGs are formed.
 Learning of how the MFIs work.
 Most important learning, how it can change the life of the Economic disadvantaged
people.

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RESARCH METHODOLOGY

Method of data collection:-

Secondary sources:It is the data which has already been collected by some one or an organization for some other
purpose or research study .The data for study has been collected from various sources:


Books



Journals



Magazines



Internet sources

Time: 2 months

Statistical Tools Used:
Simple tools like tabulation, pie charts have been used.

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INTRODUCTION
About Microfinance: Microfinance is a general term to describe financial services to lowincome individuals or to those who do not have access to typical banking services.
Microfinance is also the idea that low-income individuals are capable of lifting themselves
out of poverty if given access to financial services. While some studies indicate that
microfinance can play a role in the battle against poverty, it is also recognized that is not
always the appropriate method, and that it should never be seen as the only tool for ending
poverty.
Microfinance is defined as any activity that includes the provision of financial services such
as credit, savings, and insurance to low income individuals which fall just above the
nationally defined poverty line, and poor individuals which fall below that poverty line, with
the goal of creating social value. The creation of social value includes poverty alleviation and
the broader impact of improving livelihood opportunities through the provision of capital for
micro enterprise, and insurance and savings for risk mitigation and consumption smoothing.
A large variety of actors provide microfinance in India, using a range of microfinance
delivery methods. Since the ICICI Bank in India, various actors have endeavored to provide
access to financial services to the poor in creative ways. Governments also have piloted
national programs, NGOs have undertaken the activity of raising donor funds for on-lending,
and some banks have partnered with public organizations or made small inroads themselves
in providing such services. This has resulted in a rather broad definition of microfinance as
any activity that targets poor and low-income individuals for the provision of financial
services. The range of activities undertaken in microfinance include group lending, individual
lending, the provision of savings and insurance, capacity building, and agricultural business
development services. Whatever the form of activity however, the overarching goal that
unifies all actors in the provision of microfinance is the creation of social value.
‗Microfinance refers to small scale financial services for both credits and deposits- that are
provided to people who farm or fish or herd; operate small or micro enterprise where goods
are produced, recycled, repaired, or traded; provide services; work for wages or commissions;
gain income from renting out small amounts of land, vehicles, draft animals, or machinery
and tools; and to other individuals and local groups in developing countries in both rural and
urban areas‘.
Marguerite S. Robinson.
Chembur, Mumbai
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The History of Modern Microfinance
ABSTRACT:
In the late 1970s the concept of microfinance had evolved. Although, microfinance have a
long history from the beginning of the 20th century we will concentrate mainly on the period
after 1960.
Many credit groups have been operating in many countries for several years, for example, the
"chit funds" (India), tontines" (West Africa), "susus" (Ghana), "pasanaku" (Bolivia) etc.
Besides, many formal saving and credit institutions have been working for a long time
throughout the world.
During the early and mid 1990s various credit institutions had been formed in Europe by
some organized poor people from both the rural and urban areas. These institutions were
named Credit Unions, People's Bank etc. The main aim of these institutions was to provide
easy access to credit to the poor people who were neglected by the big financial institutions
and banks.
In the early 1970s, few experimental programs had started in Bangladesh, Brazil and some
other countries. The poor people had been given some small loans to invest in microbusiness. This kind of micro credit was given on the basis of solidarity group lending, that is,
each and every member of that group guaranteed the repayment of the loan of all the
members.
Many banks and financial institutions have been pioneering the microfinance program after
1970. These are listed below.
ACCION International:This institution had been established by a law student of Latin
America to help the poor people residing in the rural and urban areas of the Latin American
countries. Today, in 2008, it is one of the most important microfinance institutions of the
world. Its network of lending partner comprises not only Latin America but also US and
Africa.
SEWA Bank: In 1973, the Self Employed Women's Association (SEWA) of Gujarat (in
India) formed a bank, named as Mahila SEWA Cooperative Bank, to access certain financial
services easily. Almost 4 thousand women contributed their share capital to form the bank.
Today the number of the SEWA Bank's active client is more than 30,000.

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GRAMEEN Bank: Credit unions and lending cooperatives have been around hundreds of
years. However, the pioneering of modern microfinance is often credited to Dr. Mohammad
Yunus, who began experimenting with lending to poor women in the village of Jobra,
Bangladesh during his tenure as a professor of economics at Chittagong University in the
1970s. He would go on to found Grameen Bank in 1983 and win the Nobel Peace Price in
2006.
Since then, innovation in microfinance has continued and providers of financial services to
the poor continue to evolve. Today, the World Bank estimates that about 160 million people
in developing countries are served by microfinance. Grameen Bank (Bangladesh) was formed
by the Nobel Peace Prize (2006) winner Dr Muhammad Younus in 1983. This bank is now
serving almost 400, 0000 poor people of Bangladesh. Not only that, but also the success of
Grameen Bank has stimulated the formation of other several microfinance institutions like,
ASA, BRAC and PROSHIKA.

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OVERVIEW
Microfinance Definition:
According to International Labor Organization (ILO), ―Microfinance is an economic
development approach that involves providing financial services through institutions to low
income clients‖.
In India, Microfinance has been defined by ―The National Microfinance Taskforce, 1999‖ as
―provision of thrift, credit and other financial services and products of very small amounts to
the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and
improve living standards‖.
"The poor stay poor, not because they are lazy but because they have no access to capital.
"Microfinance is the supply of loans, savings, and other basic financial services to the poor."
As these financial services usually involve small amounts of money - small loans, small
savings, etc. - the term "microfinance" helps to differentiate these services from those which
formal banks provide
It's easy to imagine poor people don't need financial services, but when you think about it
they are using these services already, although they might look a little different.
"Poor people save all the time, although mostly in informal ways. They invest in assets such
as gold, jewelry, domestic animals, building materials, and things that can be easily
exchanged for cash. They may set aside corn from their harvest to sell at a later date. They
bury cash in the garden or stash it under the mattress. They participate in informal savings
groups where everyone contributes a small amount of cash each day, week, or month, and is
successively awarded the pot on a rotating basis. Some of these groups allow members to
borrow from the pot as well. The poor also give their money to neighbors to hold or pay local
cash collectors to keep it safe.
"However widely used, informal savings mechanisms have serious limitations. It is not
possible, for example, to cut a leg off a goat when the family suddenly needs a small amount
of cash. In-kind savings are subject to fluctuations in commodity prices, destruction by
insects, fire, thieves, or illness (in the case of livestock). Informal rotating savings groups
tend to be small and rotate limited amounts of money. Moreover, these groups often require
rigid amounts of money at set intervals and do not react to changes in their members' ability
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to save. Perhaps most importantly, the poor are more likely to lose their money through fraud
or mismanagement in informal savings arrangements than are depositors in formal financial
institutions.
―Poor rarely access services through the formal financial sector. They address their need for
financial services through a variety of financial relationships, mostly informal."
Role of Microfinance:
The micro credit of microfinance prename was first initiated in the year 1976 in Bangladesh
with promise of providing credit to the poor without collateral , alleviating poverty and
unleashing human creativity and endeavor of the poor people. Microfinance impact studies
have demonstrated that
1. Microfinance helps poor households meet basic needs and protects them against risks.
2. The use of financial services by low-income households leads to improvements in
household economic welfare and enterprise stability and growth.
3. By supporting women‘s economic participation, microfinance empowers women, thereby
promoting gender-equity and improving household well being.
4. The level of impact relates to the length of time clients have had access to financial
services.
Difference between micro credit and microfinance:
Micro credit refers to very small loans for unsalaried borrowers with little or no collateral,
provided by legally registered institutions. Currently, consumer credit provided to salaried
workers based on automated credit scoring is usually not included in the definition of micro
credit, although this may change.
Microfinance typically refers to micro credit, savings, insurance, money transfers, and other
financial products targeted at poor and low-income people.
Borrowers:
Most micro credit borrowers have micro enterprises—unsalaried, informal income-generating
activities. However, micro loans may not predominantly be used to start or finance micro
enterprises. Scattered research suggests that only half or less of loan proceeds are used for
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business purposes. The remainder supports a wide range of household cash management
needs, including stabilizing consumption and spreading out large, lumpy cash needs like
education fees, medical expenses, or lifecycle events such as weddings and funerals.
Some MFIs provide non-financial products, such as business development or health services.
Commercial and government-owned banks that offer microfinance services are frequently
referred to as MFIs, even though only a portion of their assets may be committed to financial
services to the poor.

Activities in Microfinance:
Micro credit: It is a small amount of money loaned to a client by a bank or other institution.
Micro credit can be offered, often without collateral, to an individual or through group
lending.
Micro savings: These are deposit services that allow one to save small amounts of money for
future use. Often without minimum balance requirements, these savings accounts allow
households to save in order to meet unexpected expenses and plan for future expenses Micro
insurance: It is a system by which people, businesses and other organizations make a
payment to share risk. Access to insurance enables entrepreneurs to concentrate more on
developing their businesses while mitigating other risks affecting property, health or the
ability to work.
Remittances: These are transfer of funds from people in one place to people in another,
usually across borders to family and friends. Compared with other sources of capital that can
fluctuate depending on the political or economic climate, remittances are a relatively steady
source of funds.
Product Design: The starting point is: how do MFIs decide what product s to offer? The
actual loan products need to be designed according to the demand of the target market.
Besides the important question of what risks to cover, organizations also have to decide
whether they want to bundle many different benefits into one basket policy, or whether it is
more appropriate to keep the product simple. For marketing purposes, MFI‗s sometimes
prefer the basket cover, since it can make the policies sound comprehensive, but is that the
right approach for the low-income market? After picking products, one must also understand
how they are priced. What assumptions do the organizations make with regard to operating
costs, risk premiums, and reinsurance, and how did they come to those conclusions? Would
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their clients be willing to pay more for greater benefits? From price, the logical next set of
questions involves efficiency. Indeed, given the relative high costs of delivering large
volumes of small policies, maximizing efficiency is a critical strategy to ensuring that the
products are affordable to the low-income market. One way is to make the products
mandatory, which increases volumes, reduces transaction costs and minimizes adverse
selection. What does an organization lose by offering mandatory insurance, and how does it
overcome the disadvantages? MFI‗s can combine a mandatory product with some voluntary
features to make the service more us to mar-oriented while.
Techniques of Product Design: To design a loan product to meet borrower needs it is
important to understand the cash pattern of the borrowers. Cash pattern is important so far as
they affect the debt capacity of the borrowers. Lenders must ensure that borrowers have
sufficient cash inflow to cover loan payments when they are due efficiency depends less on
the delivery model than on the simplicity of the product or product menu. Simple products
work best because they are easier to administer and easier for clients to understand. Another
efficiency strategy is to use technology to reduce paperwork, manual processing and errors.
MFIs need to conduct a costing analysis to determine how much they need to earn in
commission to cover their administrative expenses.
MFI’s Products and its Management:
Product & services of Microfinance
Financial Services

Other Financial Services

Non Financial Services

1. Credit Services-i Small

Micro-insurance, Life

Family Health and Sanitation

Credit, Small Business

Insurance , Health Insurance

Education, Financial

Credit.

, Loan for Housing,

Education, Micro-

Education, Health.

entrepreneur Training.

2. Deposit Services Voluntari Savings Services,
Manda tory Savings.

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The micro-credits model:
*The model is fairly straightforward and simple.
*Focus on jump-starting self-employment, providing the capital for poor women to use their
innate "survival skills" to pull themselves out of poverty.
*Lend to women in small groups (credit circles), say of five or seven.
* Make loans of small amounts to two out of five.
* The three who have not received loans will be eligible only when this first round of loans
has been repaid.
* Draw up a weekly or bi-weekly repayment schedule.
* In case any member defaults the entire circle is denied access to credit.
* Banks have been given freedom to formulate their own lending norms keeping in view
ground realities. They have been asked to devise appropriate loan and savings products and
the related terms and conditions including size of the loan, unit cost, unit size, maturity
period, grace period, margins, etc.

Chembur, Mumbai
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GOVERNMENT’S ROLE IN SUPPORTING MICRO FINANCE
Government’s most important role is not provision of retail credit services, for reasons
mentioned in Government can contribute most effectively by:
*Setting sound macroeconomic policy that provides stability and low inflation.
*Avoiding interest rate ceilings - when governments set interest rate limits, political factors
usually result in limits that are too low to permit sustainable delivery of credit that involves
high administrative costs—such as tiny loans for poor people. Such ceilings often have the
announced intention of protecting the poor, but are more likely to choke off the supply of
credit.
*Adjusting bank regulation to facilitate deposit taking by solid MFIs, once the country has
experience with sustainable microfinance delivery.
*Creating government wholesale funds to support retail MFIs if funds can be insulated from
politics, and they can hire and protect strong technical management and avoid disbursement
pressure that force fund to support unpromising MFIs.
*Promote microfinance as a key vehicle in tackling poverty, and as vital part of the financial
system.
*Create policies, regulations and legal structures that *encourage responsive, sustainable
microfinance.

*Encourage a range of regulated and unregulated institutions that meet performance
standards.

*Encourage competition, capacity building and innovation to lower costs and interest rates in
microfinance.
*Support autonomous, wholesale structures.

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RBI data shows that informal sources provide a significant part of the total credit needs of
the rural population. The magnitude of the dependence of the rural poor on informal sources
of credit can be observed from the findings of the All India Debt and Investment Survey,
1992, which shows that the share of the Non-institutional agencies (informal sector) in the
outstanding cash dues of the rural households were 36 percent. However, the dependence of
rural households on such informal sources had reduced of their total outstanding dues steadily
from 83.7 percent in 1961 to 36 percent in 1991.
Microfinance Social Aspects
Micro financing institutions significantly contributed to gender equality and women‘s
empowerment as well as poor development and civil society strengthening. Contribution to
women‘s ability to earn an income led to their economic empowerment, increased well being
of women and their families and wider social and political empowerment.
Microfinance programs targeting women became a major plank of poverty alleviation and
gender strategies in the 1990s. Increasing evidence of the centrality of gender equality to
poverty reduction and women‘s higher credit repayment rates led to a general consensus on
the desirability of targeting women.
Self Help Groups (SHGs): Self- help groups (SHGs) play today a major role in poverty
alleviation in rural India. A growing number of poor people (mostly women) in various parts
of India are members of SHGs and actively engage in savings and credit (S/C), as well as in
other activities (income generation, natural resources management, literacy, child care and
nutrition, etc.). The S/C focus in the SHG is the most prominent element and offers a chance
to create some control over capital, albeit in very small amounts.
The SHG system has proven to be very relevant and effective in offering women the
possibility to break gradually away from exploitation and isolation.
Savings services help poor people:Savings has been called the ―forgotten half of
microfinance.‖ Most poor people now use informal mechanisms to save because they lack
access to good formal deposit services,. They may tuck cash under the mattress; buy animals
or jewelry that can be sold off later, or stockpile inventory or building materials.
These savings methods tend to be risky—cash can be stolen, animals can get sick, and
neighbors can run off. Often they are illiquid as well – one cannot sell just the cow‘s leg
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when one needs a small amount of cash. Poor people want secure, convenient deposit
services that allow for small balances and easy access to funds. MFIs that offer good savings
services usually attract far more savers than borrowers.
Women’s indicators of empowerment through microfinance:
*Ability to save and access loans
*Opportunity to undertake an economic activity
*Mobility-Opportunity to visit nearby towns
*Awareness- local issues, MFI procedures, banking transactions
*Skills for income generation
*Decision making within the household
* Group mobilization in support of individual clients- action on.

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THE NEED IN INDIA
India is said to be the home of one third of the world‘s poor; official estimates range from 26
to 50 percent of the more than one billion population.
• About 87 percent of the poorest households do not have access to credit.
• The demand for micro credit has been estimated at up to $30 billion; the supply is less than
$2.2 billion combined by all involved in the sector. Due to the sheer size of the population
living in poverty, India is strategically significant in the global efforts to alleviate poverty and
to achieve the Millennium Development Goal of halving the world‘s poverty by 2015.
Microfinance can also be distinguished from charity. It is better to provide grants to families
who are destitute, or so poor they are unlikely to be able to generate the cash flow required to
repay a loan. This situation can occur for example, in a war zone or after a natural disaster.
While India is one of the fastest growing economies in the world, poverty runs deep
throughout country. About two thirds of India‘s more than 1billion people live in rural
areas and almost 170 million of them are poor.
For more than 21 percent of them, poverty is a chronic condition. Three out of four of
India‘s poor live in rural areas of the country. Poverty is deepest among scheduled
castes and tribes in the country‘s rural areas.
The micro-finance scene in India is dominated by Self Help Groups (SHGs) - Banks
linkage program for over a decade now. As the formal banking system already has a
vast branch network in rural areas, it was perhaps wise to find ways and means to
improve the access of rural poor to the existing banking network. This was tried by
routing financial.
Indian microfinance is poised for continued growth and high valuation but faces pressing
challenges and opportunities that—left unaddressed—could negatively impact the long-term
future of the industry.
The industry needs to move past a single-minded focus on scale, expand the depth and
breadth of products and services offered, and focus on the double bottom line and over
indebtedness to effectively address the risks facing the industry.

Chembur, Mumbai
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MICRO-FINANCING REGULATION IN INDIA
Advantage of Regulation:
Following are the advantages and benefits of regulation and supervision of /MFIs:
i. Protects the interest of the depositors;
ii. Put in place prudential norms, standards and practices;
iii. Provides sufficient information about the true risks faced by the banks/MFIs;
iv. Promoters systemic stability and thereby sustains public confidence in the
banks/MFIs;
v. Prevents a bank‘s/MFI‘s failure/potential dangers through timely interventions;
vi. Penalizes the violations, misconducts, non-compliance to the norms of behavior;
vii. Provides invaluable advisory inputs for problem-solving and overall improvement
of the banks/MFIs;
viii. Promoters safe, strong and sound banking/MF system and effective banking/MF
policy and
ix. Promotes and enhances orderly economic growth and development.
Unified Regulation System
8.18 at present, all the regulatory aspects of microfinance are not centralized. For
example, while the Rural Planning and Credit Department (RPCD) in RBI looks after
Rural lending, MF-NBFCs are under the control of the Department of Non-Banking
Supervision (DNBS) and External Commercial Borrowings are looked after by the
Foreign Exchange Department. The Committee feels that RBI may consider bringing
all regulatory aspects of microfinance under a single, mechanism. Further, supervision
Of MF-NBFCs could be delegated to NABARD by RBI.
Legal forms of MFIs in India
MFIs and Legal Forms: With the current phase of expansion of the SHG – Bank linkage
programmed and other MF initiatives in the country, the informal micro finance sector in
India is now beginning to evolve. The MFIs in India can be broadly sub-divided into three
categories of organizational forms as given in Table 1. While there is no published data on
private MFIs operating in the country, the number of MFIs is estimated to be around 800.
However, not more than 10 MFIs are reported to have an outreach of 100,000 micro finance
clients. An overwhelming majority of MFIs are operating on a smaller scale with clients
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ranging Between 500 to 1500 per MFI. The geographical distribution of MFIs is very much
lopsided with concentration in the southern India where the rural branch network of formal
banks is excellent. It is estimated that the share of MFIs in the total micro credit portfolio of
formal & informal institutions is about 8 per cent.
*Not for profit MFIs governed by societies registration act, 1860 or Indian trusts act
1882
*Non profit companies governed by section 25 of the companies act, 1956
*For profit MFIs regulated by Indian companies act, 1956
*NBFC governed by RBI act, 1934.
*Cooperative societies by cooperative societies act enacted by state government.
Legal Forms of MFIs in India:
Types of MFIs

Estimated

Legal Acts under which Registered

Number*
1. Not for Profit MFIs

400 to 500

Societies Registration Act, 1860 or similar
Provincial

a.) NGO - MFIs

Indian Trust Act, 1882

b.) Non-profit Companies
2. Mutual

Benefit

Acts

10
MFIs 200 to 250

a.) Mutually Aided Cooperative

Section 25 of the Companies Act, 1956
Mutually Aided Cooperative Societies Act
enacted by State Government

Societies (MACS) and similarly
set up institutions
3. For Profit MFIs
a.)

Non-Banking

6
Financial

Indian Companies Act, 1956
Reserve Bank of India Act, 1934

Companies (NBFCs)
Total

700 - 800

* The estimated number includes only those MFIs, which are actually undertaking lending
activity.

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Recommendation by RBI Micro Credit Institutions
• Company Law Board to allow SHGs to be members of Section 25 of the companies
act.
• There will be no ceiling in respect of loan amount extended by Section 25 companies
to SHGs; however SHGs, to provide credit not exceeding Rs. 50000/- per member of
the SHG. RBI may consider issuing revised instructions.
• As regards capital, to encourage more flow of donations/ contributions, donors to be
exempted from income tax under Section 11C of the IT Act.
• As regards capital adequacy, since there is no mandatory capital requirement,
minimum standards need not be considered.
• Savings of SHGs promoted by Section 25 companies be maintained with permitted
organizations.
• Complete income tax exemption for Section 25 companies purveying micro cred it (to
the donor and to the receiver).
Government to consider complete exemption from IT for income earned, as the main
purpose of the organization is to empower the poor.
The industry needs to move past a single-minded focus on scale, expand the depth and
breadth of products and services offered, and focus on the double bottom line and over
indebtedness to effectively address the risks facing the industry.

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MICRO FINANCE MODELS
Microfinance Providers
Microfinance Institutions: A microfinance institution (MFI) is an organization that provides
microfinance services.
MFIs range from small non-profit organizations to large commercial banks. Most MFIs
started as not-for-profit organizations like NGOs (non-governmental organizations), credit
unions and other financial cooperatives, and state-owned development and postal savings
banks. An increasing number of MFIs are now organized as for-profit entities, often because
it is a requirement to obtaining a license from banking authorities to offer savings services.
For-profit MFIs may be organized as Non-Banking Financial Companies (NBFCs),
commercial banks that specialize in microfinance, or microfinance departments of fullservice banks.
The micro finance service providers include apex institutions like National Bank for
Agriculture and Rural Development (NABARD), Small Industries Development Bank of
India (SIDBI), and, Rashtriya Mahila Kosh (RMK). At the retail level, Commercial Banks,
Regional Rural Banks, and, Cooperative banks provide micro finance services. Today, there
are about 60,000 retail credit outlets of the formal banking sector in the rural areas
comprising 12,000 branches of district level cooperative banks, over 14,000 branches of the
Regional Rural Banks (RRBs) and over 30,000 rural and semi-urban branches of commercial
banks besides almost 90,000 cooperatives credit societies at the village level. On an average,
there is at least one retail credit outlet for about 5,000 rural people. This physical reaching out
to the far-flung areas of the country to provide savings, credit and other banking services to
the rural society is an unparalleled achievement of the Indian banking system. In the this
paper an attempt is made to deal with various aspects relating to emergence of private micro
finance industry in the context of prevailing legal and regulatory environment for private
sector rural and micro finance operators.
MFIs are an extremely heterogeneous group comprising NBFCs, societies, trusts and
cooperatives. They are provided financial support from external donors and apex institutions
including the Rashtriya Mahila Kosh (RMK), SIDBI Foundation for micro-credit and
NABARD and employ a variety of ways for credit delivery.
Since 2000, commercial banks including Regional Rural Banks have been providing funds to
MFIs for on lending to poor clients. Though initially, only a handful of NGOs were ―into‖
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financial intermediation using a variety of delivery methods, their numbers have increased
considerably today. While there is no published data on private MFIs operating in the
country, the number of MFIs is estimated to be around 800.
For NGOs
1. The field of development itself expands and shifts emphasis with the pull of ideas, and
NGOs perhaps more readily adopt new ideas, especially if the resources required are small,
entry and exit are easy, tasks are (perceived to be) simple and people‘s acceptance is high –
all characteristics (real or presumed) of microfinance.
2. Canvassing by various actors, including the National Bank for Agriculture and Rural
Development (NABARD), Small Industries Development Bank of India (SIDBI), Friends of
Women‘s World Banking (FWWB), Rashtriya Mahila Kosh (RMK), Council for
Advancement of People‘s Action and Rural Technologies (CAPART), Rashtriya Gramin
Vikas Nidhi (RGVN), various donor funded programmes especially by the International Fund
for Agricultural Development (IFAD), United Nations Development Programme (UNDP),
World Bank and Department for International Development, UK (DFID)], and lately
commercial banks, has greatly added to the idea pull. Induced by the worldwide focus on
microfinance, donor NGOs too have been funding microfinance projects. One might call it
the supply push.
3. All kinds of things from khadi spinning to Nadep compost to balwadis do not produce such
concrete results and sustained interest among beneficiaries as microfinance. Most NGO-led
microfinance is with poor women, for whom access to small loans to meet dire emergencies
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is a valued outcome. Thus, quick and high ‗customer satisfaction‘ is the USP that has
attracted NGOs to this trade.
4. The idea appears simple to implement. The most common route followed by NGOs is
promotion of SHGs. It is implicitly assumed that no ‗technical skill‘ is involved. Besides,
external resources are not needed as SHGs begin with their own savings. Those NGOs that
have access to revolving funds from donors do not have to worry about financial performance
any way. The chickens will eventually come home to roost but in the first flush, it seems all
so easy.
5. For many NGOs the idea of ‗organizing‘ – forming a samuha – has inherent appeal.
Groups connote empowerment and organizing women is a double bonus.
6. Finally, to many NGOs, microfinance is a way to financial sustainability. Especially for the
medium-to-large NGOs that are able to access bulk funds for on-lending, for example from
SIDBI, the interest rate spread could be an attractive source of revenue than an uncertain,
highly competitive and increasingly difficult-to-raise donor funding.
Service Company Model: In this context, the Service Company Model developed by
ACCION and used in some of the Latin American Countries is interesting. The model may
hold significant interest for state owned banks and private banks with large branch networks.
Under this model, the bank forms its own MFI, perhaps as an NBFC, and then works hand in
hand with that MFI to extend loans and other services. On paper, the model is similar to the
partnership model: the MFI originates.
Coordinating Microfinance Efforts in India
NABARD coordinates the microfinance activities in India at international/ national/ state /
district levels. These include organizing international/national Workshops, Seminars, etc for
experience sharing, Organizing National and State level Meets of Bankers and NGOs etc
.Dissemination of best practices in SHG / microfinance.
Other Initiatives: Micro enterprise Development Programmer (MEDP) for Matured SHGs
The progression of SHG members to take up micro enterprise involves intensive training and
hand holding on various aspects including understanding market, potential mapping and
ultimately fine tuning skills and entrepreneurship to manage the enterprise. Hence, a separate,
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specific and focused skill-building programme ‗Micro Enterprise Development Programmed
(MEDP)‘ has been formulated.
This involves organizing short duration, location specific programmers on skill up gradation /
development for setting up sustainable micro-enterprises by matured SHG members. The
duration of training programme can vary between 3 to 13 days, depending upon the objective
and nature of training. The training may be conducted by agencies that have background and
professional competency in the field of micro enterprise Development with an expertise in
skill development.
Scheme for Capital/ Equity Support to Micro-Finance Institutions (MFIs) from
MFDEF: The scheme attempts to provide capital/equity support to Micro Finance
Institutions (MFIs) so as to enable them to leverage capital/equity for accessing commercial
and other funds from banks, for providing financial services at an affordable cost to the poor,
and to enable MFIs to achieve sustainability in their credit operations over a period of 3-5
years.
Scheme for financial assistance to banks/ MFIs for rating of Micro Finance Institutions
(MFIs): In order to identify MFIs, classify and rate such institutions and empower them to
intermediate between the lending banks and the clients, NABARD has decided to extend
financial assistance to Commercial Banks and Regional Rural Banks by way of grant. The
banks can avail the services of credit rating agencies, M-CRIL, ICRA, CARE and Planet
Finance in addition to CRISIL for rating of MFIs. The financial assistance by way of grant
for meeting the cost of rating of MFIs would be met by NABARD to the extent of 100% of
the total professional fees subject to a maximum of Rs.3,00,000/-/-. The remaining cost
would be borne by the concerned MFI.
The cost of local hospitality (including boarding and lodging) towards field visit of the team
from the credit rating Agency, as a part of the rating exercise, would also be borne by the
MFI. Those MFIs which have a minimum loan outstanding of more than Rs. 50.00 lakh
(Rupees fifty lakh only) and maximum of Rs 10 crore (Rupees Ten crore only) would be
considered for rating and support under the scheme. Financial assistance by way of grant
would be available only for the first rating of the MFI.

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MFIs availing Capital Support and/or Revolving Fund Assistance from NABARD are also
eligible for re-imbursement of 50% of the cost of professional fee charged by Credit Rating
Agency for second rating subject to a maximum of Rs.1.50 lakh (i.e 50% of Rs.3 lakh). This
will be in addition to the re-imbursement of professional fee for first rating of the MFI.
Refinance support to banks for financing MFIs: The scheme is to provide 100% refinance
to banks for financing MFIs. Interest rate on refinance to Commercial Banks and Regional
Rural Banks on their loans to MFIs for on lending to clients will be at 3% less than that
charged by banks subject to minimum interest rate of 7.5% for all regions and all eligible
purposes. The revised rate of interest is applicable to refinance disbursed on or after 01
March 2010.
Source: NABARD website

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MICRO FINANCE STRATEGIC
Strategic Management: Strategic management is a field that deals with the major intended
and emergent initiatives taken by general manager on behalf of owners, involving utilization
of resources, to enhance the performance of rams in their external environments. It entails.
Understanding microfinance strategies: This report explores strategic issues shaping the
future of the MFI sector in India.
The study approached CEOs of select MFIs with a set of issues ranging from concerns to
competition and sought their opinions about future strategies. The report draws from their
responses, and states that:
Future strategy is about being strong on processes and being overtly client-centric;
Success is a prudential combination of three factors, namely, culture, beliefs and
aspirations;
Culture is about the degree of trust rather than the rate of interest;
Risk management systems of economically weaker families are built on their beliefs
about dependability and access;
Micro credit stories have revealed ingenious ways that clients have used their loans
for purposes that satisfied their aspirations.
Finally, the sector, at about Rs. 14,000 crore (approximately US$3 bn) looks large, but is
small by any business scale. Competition and unhealthy practices are overshadowing the
good work and reputation earned over many years. MFIs in India need to overcome these
challenges in the future.
Strategic Policy Initiatives: Some of the most recent strategic policy initiatives in the area of
Microfinance taken by the government and regulatory bodies in India are: Working group on
credit to the poor through SHGs, NGOs, NABARD, 1995.
The National Microfinance Taskforce, 1999.Working Group on Financial Flows to the
Informal Sector (set up by PMO), 2002.Microfinance Development and Equity Fund,
NABARD, 2005.Working group on Financing NBFCs by Banks- RBI.

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Product-market matrix:
A market penetration strategy is a business-as-usual strategy, where the MFI focuses on
achieving growth by selling existing products in existing markets. This can be done through
more competitive pricing strategies, increased promotional activities, and more liberal terms
and conditions.
For example, the MFI may develop strategic alliances to begin

*Adapted from Ansoff 1957.

The BCG Growth-Share Matrix
The BCG Growth-Share Matrix is a portfolio planning model developed by Bruce
Henderson of the Boston Consulting Group in the early 1970's. It is based on the
observation that a company's business units can be classified into four categories based
on combinations of market growth and market share relative to the largest competit or,
hence the name "growth-share". Market growth serves as a proxy for industry
attractiveness, and relative market share serves as a proxy for competitive advantage.
The growth-share matrix thus maps the business unit positions within these two
important determinants of profitability.

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BCG Growth-Share Matrix

This framework assumes that an increase in relative market share will result in an
increase in the generation of cash. This assumption often is true because of the
experience curve; increased relative market share implies that the firm is moving
forward on the experience curve relative to its competitors, thus developing a cost
advantage. A second assumption is that a growing market requires investment in assets
to increase capacity and therefore results in the consumption of cash. Thus the position
of a business on the growth-share matrix provides an indication of its cash generation
and its cash consumption.
Henderson reasoned that the cash required by rapidly growing business units could be
obtained from the firm's other business units that were at a more mature stage and
generating significant cash. By investing to become the market share leader in a rapidly
growing market, the business unit could move along the experience curve and develop a
cost advantage.
From this reasoning, the BCG Growth-Share Matrix was born.
The four categories are
Dogs - Dogs have low market share and a low growth rate and thus neither generate nor
consume a large amount of cash. However, dogs are cash traps because of the money tied
up in a business that has little potential. Such businesses are candidates for divestiture.
Question marks - Question marks are growing rapidly and thus consume large amounts
of cash, but because they have low market shares they do not generate much cash. The
result is large net cash consumption. A question mark (also known as a "problem child")
has the potential to gain market share and become a star, and eventually a cash cow
when the market growth slows. If the question mark does not succeed in becoming the
market leader, then after perhaps years of cash consumption it will degenerate into a dog

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when the market growth declines. Question marks must be analyzed carefully in order to
determine whether they are worth the investment required to grow market share.
Stars - Stars generate large amounts of cash because of their strong relative market
share, but also consume large amounts of cash because of their high growth rate;
therefore the cash in each direction approximately nets out.
If a star can maintain its large market share, it will become a cash cow when the market
growth rate declines. The portfolio of a diversified company always should have stars
that will become the next cash cows and ensure future cash generation.
Cash cows - As leaders in a mature market, cash cows exhibit a return on assets that is
greater than the market growth rate, and thus generate more cash than they consume.
Such business units should be "milked", extracting the profits and investing as litt le cash
as possible. Cash cows provide the cash required to turn question marks into market
leaders, to cover the administrative costs of the company, to fund research and
development, to service the corporate debt, and to pay dividends to shareholders.
Because the cash cow generates a relatively stable cash flow, its value can be determined
with reasonable accuracy by calculating the present value of its cash stream using a
discounted cash flow analysis.
Under the growth-share matrix model, as an industry matures and its growth rate
declines, a business unit will become either a cash cow or a dog, determined solely by
whether it had become the market leader during the period of high growth.
While originally developed as a model for resource allocation amon g the microfinance
business units in a corporation, the growth-share matrix also can be used for resource
allocation among products within a single business unit. Its simplicity is its strength - the
relative positions of the firm's entire business portfolio can be displayed in a single
diagram.
Limitations
The growth-share matrix once was used widely, but has since faded from popularity as
more comprehensive models have been developed. Some of its weaknesses are:
Market growth rate is only one factor in industry attractiveness, and relative market
share is only one factor in competitive advantage. The growth-share matrix overlooks
many other factors in these two important determinants of profitability. The framework
assumes that each business unit is independent of the others. In some cases,

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Microfinance business unit that is a "dog" may be helping other business units gain a
competitive advantage.
The matrix depends heavily upon the breadth of the definition of the market. A business
unit may dominate its small niche, but have very low market share in the overall
industry. In such a case, the definition of the market can make the difference between a
dog and a cash cow.
While its importance has diminished, the BCG matrix still can serve as a simple tool or
viewing a corporation's business portfolio at a glance, and may serve as a starting point
for discussing resource allocation among strategic business units.

Overall Strategy
*Forming and nurturing small, homogeneous and participatory self-help groups (SHGs) of
the poor has today emerged as a potent tool for human development.
This process enables the poor, especially the women from the poor households, to
collectively identify and analyses the problems they face in the perspective of their social and
economic environment. It helps them to pool their meager resources, human and financial,
and priorities their use for solving their own problems.
*The emphasis on regular thrift collection and its use to solve immediate problems of
consumption and production not only helps to meet their most urgent needs, but also trains
them to handle larger financial resources more skillfully, prudently and with a more lasting
impact.
*Encourage SHGs to become a forum for many social sector interventions.
SHG-Bank Linkage Programmer
A Facilitating SHGs to access credit from formal banking channels. SHG-Bank Linkage
Programmer has proved to be the major supplementary credit delivery system with wide
acceptance by banks, NGOs and various government departments.
Capacity Building

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Capacity building must be tailored to meet the differing needs of the nascent/emerging MFIs
and of the expanding/mature MFIs. There is a pressing need to develop comprehensive,
relevant and integrated training modules on a wide range of topics to professionalize Indian
microfinance – thus building the much sought-after second tier management in MFIs. The
industry continues to grow, and so does the demand for competent middle management.
Currently, these are typically sourced by MFIs from the rural institutes of management. But
these rural institutes are using curricula largely based on the one developed by SIDBI nearly
a decade ago – and it is high time to revisit this curriculum, to update it both in terms of
content (to reflect the new realities in India microfinance) and in terms of its delivery (to use
multi-media/practical examples, and thus bring the courses to life with video clips, case
studies and field-based exercises that take the students out into the field).

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MICRO FINANCE MANAGEMENT
Objectives: The programmer aims at enabling the participants to gain a clear understanding
of various policies, conceptual, and operational issues involved in developing effective and
successful microfinance interventions.
Innovative Methodologies: Tiny amount of loan to large number of borrowers at their
doorstep is a costly operation compared to revenue income. Cost reduction is also an essential
element in microfinance operation. Reducing cost can be possible either offering larger loan
size or by innovating no conventional Management which is less costly.
The essences of innovative management are as follows:
1. Specialized operation.
2. Documentation of essential information only.
3. Simple product, simple loan application and verification process.
4. Absence of grant guarantee.
5. Staff recruitment in no conventional manner.
6. On the job training (each one teaches one).
7. Simple standard loan register along with ledger and cash book abandoning the
bookkeeper/cashier.
8. Standard furniture, fixture and collective use of facilities in the office.
9. Decentralized branch structure.
10. Branch level financial planning.
11. Strong monitoring from mid and head office.
12. Written Manual.
Microfinance Working Environment: How can microfinance institutions (MFIs) help
improve working conditions? How can they contribute to job creation? And how can MFIs
help reduce child labor? Should MFIs have an interest in addressing these and other decent
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work issues? These are some of the questions that the ILO intends to address through an
experimental global action research programmer (2008-2011) in partnership with
microfinance Institutions interested in promoting decent work. Access to micro credit or
other financial services can help improve the decent work status. Conditional loans, credit
with education, incentives like interest rate rebates, linkages with social partners and NGOs
as well as the provision of micro insurance, conditional cash transfers or health care can be
effective ways to reduce child labor, decrease vulnerabilities, raise awareness and create
incentives to improve working conditions.
Enabling Environment
Favorable environment for microfinance in different manners are prevailing in most
developing countries. Favorable environment is not only among Government but also among
general public, civil society, media and various institutions within the country needed for
favorable growth of microfinance for poverty reduction. Though Government is favorable in
general to microfinance in many countries but specific modalities of NGOs/ MFIs determine
the nature of favorable.
Current Challenging Issues
1. Capacity Building: The long-term future of the micro-finance sector depends on MFIs
being able to achieve operational, financial and institutional sustainability.
2. Innovation: Tiny amount of loan to large number of borrowers at their doorstep is a costly
operation compared to revenue income. Cost reduction is also an essential element in
microfinance operation.
Reducing cost can be possible either offering larger loan size or by innovating no
conventional Management which is less costly.
3. Funding: A substantial outreach is a guarantee of efficiency that can play a large part in
leveraging funds.
4. Outreach: A substantial outreach is a guarantee of efficiency that can play a large part in
leveraging funds.
HR Issues: Recruitment and retention is the major challenge faced by MFIs as they strive to
reach more clients and expand their geographical scope. Attracting the right talent proves
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difficult because candidates must have, as a prerequisite, a mindset that fits with the
organization‘s mission.
Many mainstream commercial banks are now entering microfinance, who are poaching staff
from MFIs and MFIs are unable to retain them for other job opportunities. 85% of the poorest
clients served by microfinance are women. However, women make up less than half of all
microfinance staff members, and fill even fewer of the senior management roles. The
challenge in most countries stems from cultural notions of women‘s roles, for example, while
women are single there might be a greater willingness on the part of women‘s families to let
them work as front line staff, but as soon as they marry and certainly once they start having
children, it becomes unacceptable. Long distances and long hours away from the family are
difficult for women to accommodate and for their families to understand.
Microfinance Training & Capacity Building Methods:
1. Microfinance Training Methodology and How to Build Efficient Workforce?
2. Staff Motivation & Built in Cost effective Training Component.
3. Human Resource Planning and Development.
4. Good Governance.
SWOT MATRIX for Microfinance Management:
STRENGTHS
1. Experienced senior management Team.
2. Robust IT system.
3. Clear and well defined HR policy.
4. Infusion of own equity - commitment from promoters.
5. Process innovation.
6. Clarity and good understanding of vision.
7. Transparency at all levels.
8. Plans for value added and livelihood support services (LDS).
9. Shared ownership.

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WEAKNESSES
1. Limited resources.
2. Micro managing.
3. Start up organisation; therefore, yet to institutionalise the standard processes.
4. Attracting/Holding on to the staff till the time we become established players.
5. Refine the processes for growth.
OPPORTUNITIES
1. Huge Potential Market.
2. Scope of introducing livelihood related services.
3. Financial crunch is helping organisation to be cost conscious and effective.
4. IT systems.
THREATS
1. Financial crisis.
2. Increasing competition.
3. Increasing competition.
4. Poor banking infrastructure.
5. Political instability.
Microfinance Operation management
1. Capacity Building: The long-term future of the micro-finance sector depends on MFIs
being able to achieve operational, financial and institutional sustainability. The constraints
and challenges vary with the different types and development stage of MFIs. Most MFIs are
currently operating below operational viability and use grant funds from donors for financing
up-front costs of establishing new groups and covering initial losses incurred until the lending
volume builds up to a break-even level. The MFIs are generally constrained in reaching a
break-even level and finally achieving sustainability, primarily due to a narrow client and
product base, high operational and administrative costs for delivering credit to the poor, and
their inability to mobilize requisite resources. Moreover, lack of technical manpower,
operational systems, infrastructure and MIS are prevalent. In view of the above, to scale up
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micro-finance initiatives at a faster pace, a special effort is required for capacity building of
the Micro Finance Institutions. In this background, SFMC has in the past under the DFID
collaboration (which has since come to an end on March 31,2009) provided need based
capacity building support to the partner MFIs, in the initial years, to enable them to expand
their operations, cover their managerial, administrative and operational costs besides helping
them achieve self-sufficiency in due course.
2. Liquidity Management: In view of the fact that liquidity is a major concern of many of
the middle level MFIs and a small working capital support can go a long way in their better
liquidity management and thus pave way for faster growth, SFMC has introduced a special
short term loan scheme, Liquidity Management Support (LMS) for the long term partners.
3. Equity: Provision of equity capital to the NBFC-MFIs is perceived as an emerging
requirement of the micro finance sector in India. SIDBI provides equity capital to eligible
institutions not only to enable them to meet the capital adequacy requirements but also to
help them leverage debt funds. Keeping in tune with the sect oral requirements, the bank has
also introduced quasi-equity products viz., optionally convertible Preference share capital;
optionally convertible debt and optionally convertible Subordinate debt for new generation
MFIs which are generally in the pre-breakeven stage requiring special dispensation for capital
support by way of a mix of Tier I and Tier II capital.
4. Transformation Loan:The Transformation Loan (TL) product is envisaged as a quasiequity type support to partner MFIs that are in the process of transforming themselves / their
existing structure into a more formal and regulated set-up for exclusively handling micro
finance operations in a focused manner.
Being quasi-equity in nature, TL helps the MFIs not only in enhancing their equity base but
also in leveraging loan funds and expanding their micro credit operations on a sustainable
basis. The product has the feature of conversion into equity after a specified period of time
subject to the MFI attaining certain structural, operational and financial benchmarks. This
non-interest bearing support facilitates the young but well performing MFIs to make long
term institutional investments and acts as a constant incentive to transform themselves into
formal and regulated entities.
5. Micro Enterprise Loans: In order to build and strengthen new set of intermediaries for
Micro Enterprise Loans, the Bank has formulated new scheme for Micro Enterprise Loans.
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Institutions/ MFIs with minimum fund requirement of Rs. 25 lakh p.a. and having
considerable experience in financial intermediation/ facilitating or setting up of enterprises/
providing escort services to SSI/ tiny units/ networking or active interface with SSIs etc. and
having professional expertise and capability to handle on-lending transactions shall be
eligible under the dispensation. The institutions would be selected based on their relevant
experience, potential to expand, professional management, transparency in operations and
well laid-out systems besides qualified/ trained manpower.
Lending to be based strictly on an intensive in-house appraisal supplemented with the credit
rating by an independent professional agency. Relaxed security norms more or less on line
with micro credit dispensation to be adopted to reduce procedural bottlenecks as well as to
facilitate easy disbursements.
6. Loan Syndication: Keeping in view the increased fund requirement of major partner
MFIs, the Bank has also undertaken fee based syndication arrangement where loan
requirement is comparatively higher.
7. Microfinance Operations:
a. Marketing Strategy and Microfinance Clients Targeting Methodology.
b. Microfinance Products, Services and Lending Procedures.
c. Microfinance Lending Methodology: Individual and Group Lending.
d. Micro finance Indian Lending Methodology.
e. Institutional Business Planning for Microfinance Program6. Financial Planning &
Analysais.
f. Savings and Credit Management.
g. Program Operational Policies and Procedures.
h. Accounting and Record Keeping.
i. Auditing for Microfinance Operation.
j. Management Information System.

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k. Branch Manager Leadership Training: Managing, Controlling, and Reporting Tools.
l. Detection of Fraud and Internal Control.
m. Monitoring and Supervision System.
n. Delinquencies and its Management.
Clients of micro finance
The typical micro finance clients are low-income persons that do not have access to formal
financial institutions. Micro finance clients are typically self-employed, often householdbased entrepreneurs. In rural areas, they are usually small farmers and others who are
engaged in small income-generating activities such as food processing and petty trade. In
urban areas, micro finance activities are more diverse and include shopkeepers, service
providers, artisans, street vendors, etc. Micro finance clients are poor and vulnerable nonpoor who have a relatively unstable source of income.
The six principles of client protection are:
1. Avoidance of Over-Indebtedness: Providers will take reasonable steps to ensure that
credit will be extended only if borrowers have demonstrated an adequate ability to
repay and loans will not put the borrowers at significant risk of over-indebtedness.
Similarly, providers will take adequate care that non-credit, financial products, such
as insurance, provided to low-income clients are appropriate.
2. Transparent and Reasonable Pricing: The pricing, terms and conditions of financial
products (including interest charges, insurance premiums, all fees, etc.) are
transparent and will be adequately disclosed in a form understandable to clients.
3. Appropriate Collections Practices: Debt collection practices of providers will not be
abusive or coercive.
4. Ethical Staff Behavior: Staff of financial service providers will comply with high
ethical standards in their interaction with microfinance clients and such providers will
ensure that adequate safeguards are in place to detect and correct corruption or
mistreatment of clients.

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5. Mechanisms for Redress of Grievances: Providers will have in place timely and
responsive mechanisms for complaints and problem resolution for their clients.

6. Privacy of Client Data: The privacy of individual client data will be respected, and
such data cannot be used for other purposes without the express permission of the
client (while recognizing that providers of financial services can play an important
role in helping clients achieve the benefits of establishing credit histories).
Social performance measurement
The Social Performance Task Force defines social performance as: "The effective translation
of an institution's social mission into practice in line with accepted social values that relate to
serving larger numbers of poor and excluded people; improving the quality and
appropriateness of financial services; creating benefits for clients; and improving social
responsibility of an MFI.‖Most MFIs have a social mission that they see as more basic than
their financial objective, or at least co-equal with it. There is a great deal of truth in the adage
that institutions manage what they measure.
Social performance measurement helps MFIs and their stakeholders focus on their social
goals and judge how well they are meeting them. Social indicators are often less
straightforward to measure, and less commonly used than financial indicators that have been
developed over centuries. Today‘s increasing use of social measures reflects an awareness
that good financial performance by an MFI does not automatically guarantee client interests
are being appropriately advanced.

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CRITICAL ANALYSIS
MFIs Critical Issues: MFIs can play a vital role in bridging the gap between demand &
supply of financial services if the critical challenges confronting them are addressed.
Sustainability: The first challenge relates to sustainability. It has been reported in literature
that the MFI model is comparatively costlier in terms of delivery of financial services. An
analysis of 36 leading MFIs2 by Jindal & Sharma shows that 89% MFIs sample were subsidy
dependent and only 9 were able to cover more than 80% of their costs. This is partly
explained by the fact that while the cost of supervision of credit is high, the loan volumes and
loan size is low. It has also been commented that MFIs pass on the higher cost of credit to
their clients who are ‗interest insensitive‘ for small loans but may not be so as loan sizes
increase. It is, therefore, necessary for MFIs to develop strategies for increasing the range and
volume of their financial services.
Lack of Capital: The second area of concern for MFIs, which are on the growth path, is that
they face a paucity of owned funds. This is a critical constraint in their being able to scale up.
Many of the MFIs are socially oriented institutions and do not have adequate access to
financial capital. As a result they have high debt equity ratios. Presently, there is no reliable
mechanism in the country for meeting the equity requirements of MFIs. As you know, the
Micro Finance Development Fund (MFDF), set up with NABARD, has been augmented and
re-designated as the Micro Finance Development Equity Fund (MFDEF). This fund is
expected to play a vital role in meeting the equity needs of MFIs.
Borrowings: In comparison with earlier years, MFIs are now finding it relatively easier to
raise loan funds from banks. This change came after the year 2000, when RBI allowed banks
to lend to MFIs and treat such lending as part of their priority sector-funding obligations.
Private sector banks have since designed innovative products such as the Bank Partnership
Model to fund.

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Top 14 Microfinance Institutions in India by Growth of Number of active Borrowers.

Problems for Alternative Micro-Finance Institutions: The main aim with which the
alternative MFIs have come up is to bridge the increasing gap between the demand and
supply. A vast majority of them set up as NGOs for getting access to funds as, the existing
practices of mainstream financing institutions such as SIDBI and NABARD and even of the
institutions specially funding alternatives, such RMK and FWWB, is to fund only NGOs, or
NGO promoted SHGs. As a result, the largest incentive to enter such services remains
through the nonprofit route. The alternative finance institutions also have not been fully
successful in reaching the needy.
There are many reasons for this:
1. Financial problems leading to setting up of inappropriate legal structures.
2. Lack of commercial orientation.

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3. Lack of proper governance and accountability.
4. Isolated and scattered.
Risk: This looks at the quality of their loan portfolio measured as the percent of the portfolio
at risk greater than 30 days. And return, which is measured as a combination of return on
equity and return on assets.
From this above table we can notice that the Risk of companies is measured as the percentage
of
Portfolio at Risk (PAR) which means and returns is measured as a combination of ROA and
ROE.
Return on Assets (ROA): A Return on Assets is an indication of how well an MFI is
managing its asset base to maximize its profits. The ratio does not evaluate the source of the
asset base – whether through debt or equity, but simply the return of the portfolio and other
revenue generated from investments and operations. A return on assets should be positive.
There is a positive relationship between Return on Assets and the Portfolio to Assets ratio
discussed in the next section. MFIs that maintain most of their assets in the loan portfolio
tend to break even sooner, and generate higher returns on their assets; provided the loan
portfolio performs well and other costs are also controlled.
Return on Assets = Net Operating Income – Taxes____
Average Assets

Trend: An increasing Return on Assets is positive.

Return on Assets (ROA) indicates how well an MFI is managing its assets to optimize its
profitability. The ratio includes not only the return on the portfolio, but also all other revenue
generated from investments and other operating activities.
From the above list we can notice that, there are seven companies of India in top 50
companies
in the world. There is a huge potential for India to grow in this sector, because out of total
500
million poor people from all over the world, who is getting beneficial from the micro finance
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institutions, 80 to 90 million are from India only. So there is still a huge market and
opportunities in this segment.
The total loan that the MFI‗s had provided to the poor people in India crosses Rs 24 billion
till
October 08. And this is only 40% of the total poor. If this turns into 100%, then we will see
the new face of India.
Return on Equity: A Return on Equity is probably one of the most important profitability
indicators for commercial banks and MFIs, particularly in comparison with other institutions.
The return is measured only in relation to what the MFI has built from operating surpluses, or
what it has generated through donations or other contributed sources. The shareholders of a
for-profit MFI or bank, is very interested in this ratio, as it is a measure of their investment
choice, and its ability to pay dividends. Increasing equity also strengthens the MFI‘s capital
structure and its ability to leverage debt financing. As markets mature and competition
increases, Return on Equity may level off and maintain a positive position without increasing
dramatically or at all.
Return on Equity = Net Operating Income – Taxes____
Average Equity

Trend: An increasing Return on Equity is positive.
Risk Management: Risk management is a discipline for dealing with the possibility that
some future event will cause harm. It provides strategies, techniques, and an approach to
recognizing and confronting any threat faced by an organization in fulfilling its mission. Risk
management may be as uncomplicated as asking and answering three basic questions:

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Major Risks to Microfinance Institutions:
Financial Risks

Operational Risks

Strategic Risk

Credit Risk

Transaction Risk

Governance Risk

Transaction risk
Human

Portfolio risk

resources

Information

Liquidity Risk

&

Risk Ineffective

technology Poor

Risk

Market Risk
Interest

rate

risk

Foreign

exchange

risk

Investment portfolio risk

oversight
governance

structure

Fraud

(Integrity)

Legal

&

Risk Reputation Risk

Compliance External Business

Risk

Risks
Event risk

Sources: - www. Scribd.com
This are the most significant risks (with the most potentially damaging consequences for the
MFI), how they interact, and current challenges faced by MFIs.

Financial Risks: Most MFIs focus on financial risks, including credit, liquidity, Interest rate,
and investment risks. Mentioned under are the risks which are very critical for the MFI‗s.
Credit risk: Credit risk, the most frequently addressed risk for MFIs, is the risk to earnings
or capital due to borrowers‘ late and non-payment of loan obligations. Credit risk
encompasses both the loss of income resulting from the MFI‗s inability to collect anticipated
interest earnings as well as the loss of principle resulting from loan defaults. Credit risk
includes both transaction risk and portfolio risk.
Transaction risk: Transaction risk refers to the risk within individual loans. MFIs mitigate
transaction risk through borrower screening techniques, underwriting criteria, and quality
procedure for loan disbursement, monitoring, and collection.
Portfolio risk: Portfolio risk refers to the risk inherent in the composition of the overall loan
portfolio. Policies on diversification, maximum loan size, types of loans, and loan structures
lessen the portfolio risk.

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Liquidity risk: Liquidity risk is the ―risk that an MFI cannot meet its obligations on a
timely basis Liquidity risk usually arises from management‗s inability to adequately
anticipate and plan for changes in funding sources and cash needs.
Efficient Liquidity Management requires maintaining sufficient cash reserves on hand (to
meet client withdrawals, disburse loans and fund unexpected cash shortages) while also
investing as many funds as possible to maximize earnings. Liquidity management is an
ongoing effort to strike a balance between having too much cash and too little cash.
Interest rate risk: Interest rate risk is the risk of financial loss from changes in market
interest rates. The greatest interest rate risk occurs when the cost of funds goes up faster than
the financial institution can or is willing to adjust its lending rates.
Manage interest rate risk: To reduce the mismatch between short-term variable rate
liabilities and long-term fixed rate loans, managers may refinance some of the short-term
borrowings with long-term fixed rate borrowings. This might include offering one and twoyear term deposits as a product and borrowing five to 10 year funds from other sources. Such
a step reduces interest rate risk and liquidity risk, even if the MFI pays a slightly higher rate
on those funding sources.
To boost profitability, MFIs may purposely ―mismatch assets and liabilities in anticipation
of changes in interest rates. If the asset liability managers think interest rates will fall in the
near future, they may decide to make more long-term loans at existing fixed rates, and
shorten the term of the MFI‗s liabilities. By lending long and borrowing short, the MFI can
take advantage of the cheaper funding in the future, while locking in the higher interest rates
on the asset side. In this case, the MFI has increased the interest rate risk in the hope of
improving the profitability of the bank.
Operational Risks: Operational risk arises from human or computer error within daily
service or product delivery. This risk includes the potential that inadequate technology and
information systems, operational problems, insufficient human resources, or breaches of
integrity (i.e. fraud) will result in unexpected losses.

Two types of operational risk: transaction risk and fraud risk:
Transaction risk: Transaction risk is particularly high for MFIs that handle a high volume of
small transactions daily. Since MFIs make many small, short-term loans, this same degree of
cross-checking is not cost-effective, so there are more opportunities for error and fraud. As

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more MFIs offer additional financial products, including savings and insurance, the risks
multiply and should be carefully analyzed as MFIs expand those activities
Fraud risk: Fraud risk is the risk of loss of earnings or capital as a result of intentional
deception by an employee or client. The most common type of fraud in an MFI is the direct
theft of funds by loan officers or other branch staff. Other forms of fraudulent activities
include the creation of misleading financial statements, bribes etc.
Minimize fraud risk: To introduced an education campaign to encourage clients to speak
out against corrupt staff and group leaders. This standardized all loan policies and procedures
so that the staff cannot make any decision outside the regulations. To Established an
inspection unit that performs random operational checks.
Strategic Risks: Strategic risks include internal risks like those from adverse business
decisions or improper implementation of those decisions, poor leadership, or ineffective
governance and oversight, as well as external risks, such as changes in the business or
competitive environment.
This section focuses on two critical strategic risks: Governance Risk, Business Environment
Risk.
Governance risk: Governance risk is the risk of having an inadequate structure or body to
make effective decisions. The Financial crisis, described above illustrates the dangers of poor
governance that nearly resulted in the failure of that institution.
External business environment risk: Business environment risk refers to the inherent risks
of the MFI‗s business activity and the external business environment. To minimize business
risk, the microfinance institution must react to changes in the external business environment
to take advantage of opportunities, to respond to competition, and to maintain a good public
reputation.
MFI manage their repayment and risk management: Risk is an integral part of financial
services. When financial institutions issue loans, there is a risk of borrower default. When
banks collect deposits and on-lend them to other clients (i.e. conduct financial
intermediation), they put clients‘ savings at risk. Most MFIS‗s provides the loans without or
with smaller portion of deposit or, so for them repayment of interest or principal is very risky.
All MFI‗s face risks that they must manage efficiently and effectively to be successful. When
poorly managed risks begin to result in financial losses, donors, investors, lenders, borrowers
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and savers tend to lose confidence in the organization and funds begin to dry up. When funds
dry up, an MFI is not able to meet its social objective of providing services to the poor and
quickly goes out of business.
Benefit of Risk Management: Early warning system for potential problems: A systematic
process for evaluating and measuring risk identifies problems early on, before they become
larger problems or drain management time and resources. Less time fixing problems means
more time for production and growth. Better information on potential consequences, both
positive and negative. A proactive and forward-thinking organizational culture will help
managers identify and assess new market opportunities, foster continuous improvement of
existing operations, and more effectively performance incentives with the organization‗s
strategic goals. Encourages cost-effective decision-making and more efficient use of
resources.
Interest Rates: Most MFI‘s financially sustainable by charging interest rates that are high
enough to cover all their costs.
Four key factors determine these rates:
•The cost of funds.
•The MFI's operating expenses.
•Loan losses.
•And profits needed to expand their capital base and fund expected future growth.
There are three kinds of costs the MFI has to cover when it makes micro loans:
•The cost of the money that it lends.
•The cost of loan defaults.
•Transaction and Operating cost.
For instance, MFI lends is 10 percent, and it experiences defaults of 1 percent of the amount
lent, then total Rs 11 for a loan of Rs 100, and Rs 55 for a loan of Rs 500. And the third cost
i.e. transaction cost.
The interest rates are deregulated not only for private MFIs but also for formal baking sector.
In the context of softening of interest rates in the formal banking sector, the comparatively
higher interest rate (12 to 24 per cent per annum) charged by the MFIs has become a
contentious issue. The high interest rate collected by the MFIs from their poor clients is
perceived as exploitative. It is argued that raising interest rates too high could undermine the
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social and economic impact on poor clients. Since most MFIs have lower business volumes,
their transaction costs are far higher than that of the formal banking channels. The high cost
structure of MFIs would affect their sustainability in the long run.
MFI being criticized because of high interest rate: Most MFI‗s financially sustainable by
charging interest rates that are high enough to cover all their costs. The problem is that the
administrative costs are inevitably higher for tiny micro lending than for normal bank
lending. As a result, interest rates in sustainable microfinance institutions (MFIs) are
substantially higher than the rates charged on normal bank loans.
Four key factors determine these rates:
1. The cost of funds,
2. the MFI's operating expenses,
3. Loan losses,
4. And profits needed to expand their capital base and fund expected future growth.
Formula to decide the interest rate is:
R = AE + LL + CF + K - II
1– LL
Where AE is administrative expenses, LL is loan losses, CF is the cost of funds, K is the
desired Capitalization rate and II is investment income.

Example:
Suppose that the transaction cost is Rs 15 per loan and that the loans are for one year. To
break even on the Rs 500 loan, the MFI would need to collect interest of Rs 50 + Rs 5 + Rs
15 = Rs 70, which represents an annual interest rate of 13 percent. To break even on the Rs
100 loan, the MFI would need to collect interest of Rs 10 +Rs 1 + Rs 15 = Rs 26, which is an
interest rate of 26 percent.

SWOT Analysis:
SWOT stands for Strength, Weakness, Opportunity, and Threat.
Strength
Helped in reducing the poverty: The main aim of Micro Finance is to provide the
loan to the individuals who are below the poverty line and cannot able to access from
the commercial banks. As we know that Indian, more than 350 million people in

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India are below the poverty and for them the Micro Finance is more than the life. By
providing small loans to this people Micro finance helps in reducing the poverty.
Huge networking available: For MFIs and for borrower, both the huge network is
there. In India there are many more than 350 million who are below the poverty line,
so for MFIs there is a huge demand and network of people. And for borrower there
are many small and medium size MFIs are available in even remote areas.

Weakness
•

Not properly regulated: In India the Rules and Regulation of Micro Finance Institutions

are not regulated properly. In the absent of the rules and regulation there would be high case
of credit risk and defaults. In the shed of the proper rules and regulation the Micro finance
can function properly and efficiently.
•

High number of people access to informal sources: According to the World Bank

report 80% of the Indian poor can‗t access to formal source and therefore they depend on the
informal sources for their borrowing and that informal charges 40 to 120% p.a.
•

Concentrating on few people only: India is considered as the second fastest developing

country after China, with GDP over 8.5% from the past 5 years. But this all interesting
figures are just because of few people. India‗s 70% of the population lives in rural area, and
that portion is not fully touched.

Opportunity
Huge demand and supply gap: There is a huge demand and supply gap among the
borrowers and issuers. In India around 350 million of the people are poor and only
few MFIs there to serving them.
There is huge opportunity for the MFIs to serve the poor people and increase their
living standard. The annual demand of Micro loans is nearly Rs 60,000 crore and only
5456 crore are disbursed to the borrower.( April 09) Employment Opportunity:
Micro Finance helps the poor people by not only providing them with loan but also
helps them in their business; educate them and their children etc. So in this Micro
Finance helping in increase the employment opportunity for them and for the society.
Huge Untapped Market: India‗s total population is more than 1000 million and out of
350 million is living below poverty line. So there is a huge opportunity for the MFIs

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to meet the demand of that unsaved customers and Micro Finance should not leave
any stones unturned to grab the untapped market.
Opportunity for Pvt. Banks: Many Pvt. Banks are shying away from to serve the
people are unable to access big loans, because of the high intervention of the Govt.
but the door open for the Pvt. Players to get entry and with flexible rules Pvt. Banks
are attracting towards this segment.

Threat
High Competition: This is a serious threat for the Micro Finance industry, because as
the more players will come in the market, their competition will rise , and we know
that the MFIs has the high transaction cost and after entrant of the new players there
transaction cost will rise further, so this would be serious threat.
Neophyte Industry: Basically Micro Finance is not a new concept in India, but that
was all by informal sources. But the formal source of finance through Micro Finance
is novice, and the rules are also not properly placed for it.
Over involvement of Govt.: This is the biggest that threat that many MFIs are facing.
Because the excess of anything is injurious, so in the same way the excess
involvement of Govt. is a serious threat for the MFIs. Excess involvement definition
is like waive of loans, make new rules for their personal benefit etc.

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Micro-Finance Accounting and Management Information Systems
The basic components of an accounting system are fairly universal and applicable to all org
Source documents form the basis of all transactions. A Chart of Accounts is a numbered
system that is structured to Classify and organize transactions by account. The journals cash
journals, general journals, or bank journals record each and every transactions or adjustment.
They are summarized monthly, cross-totaled and posted to the general ledger. The general
ledger holds a record for each account in the Chart of Accounts. It accumulates the totals
posted from the journals to provide monthly and annual revenue and expenses for reporting
periods. It accumulates all the accounts of the Balance Sheet.
These accounting records and processes form the basis of all accounting systems. Most MFIs
choose computerized. The following diagram illustrates a ―generic‖ financial management
information system in a microfinance institution, whether its clients are individuals, Self Help
Groups, Solidarity Groups, or Joint Liability Groups, and regardless of its legal structure or
registration. The accounting system follows the usual flow from transaction to the parathion
of financial statements. One of the most distinctive aspects of the accounting system for
microfinance institutions is that financial and operational activity must be tracked by Branch.
Loan information should also be tracked by Credit Officer, by product and by area if needed.
This is critical for internal management & monitoring.
Another distinctive aspect of accounting for MFIs is that the loan tracking system for client
transactions acts as a subsidiary ledger. Client transactions must be entered into both systems,
but can be summarized in the accounting general ledger. Some loan tracking systems are
manual, but it is a huge challenge to handle a large number of clients, produce reports &age
loans with great efficiency in a manual system. Most MFIs prefer automated systems,
particularly loan tracking systems that are integrated with, and linked to a general ledger. The
following diagram shows the connection between the two systems.

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Accounting System and Client Portfolio System (MIS) Microfinance

The MFI financial management systems illustrated dose not operates in a vacuum. There are
four distinct areas that guide & govern a well-managed & effective financial system.
Portfolio Report: Is it a number reflecting a period of time (e.g. the Income Statement, and
some numbers from the Portfolio Report)? Is the number reflective of information from a
point in time – as from the Balance Sheet? When Income Statement numbers or any number
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reflecting a period of activity is used to calculate a ratio, the second component of the ratio
must also reflect a period of activity. Therefore, some of the ratio components take the
average of Balance Sheet numbers. Remember to note these distinctions in the ratio
calculations.
MFI in India Growth of Gross Loan Portfolio

Asset and Liability Management
Yield

= Cash Received from Interest, Fees and Commissions on Loan Portfolio___
Average Gross Loan Portfolio

Trend: An increasing yield is positive although it will level off as it nears the effective
interest rate.

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Basic Financial Management and Ratio Analysis for MFIs
MFI stakeholders expect MFI senior managers to ensure that strong and adequate financial
systems are in place in the MFI. Therefore, it is essential that MFI managers have a solid
understanding and appreciation of the financial and accounting systems.
The Basic Financial Management and Ratio Analysis for MFIs offer a practical training in
basic financial management and ratio analysis for MFIs. It provides an overview of the key
aspects of accounting in microfinance institutions describes the primary financial statements
and portfolio reports of MFIs and describes the commonly accepted financial ratios used for
monitoring, reporting and measuring MFI performance. Performance ratios cover four
general areas of MFI operations: sustainability or profitability, asset and liability
management, portfolio quality and productivity and efficiency.
Its helps develop clarity on the need of the different financial statements, the relation between
them. The training helps develop skills to analyze these statements and calculate different
ratios which will give the correct picture on the financial health of the organization. This is
done through supporting documents, diagrammatic representations, and exercises.
Financial ratios are useful indicators of a firm's performance and financial situation. Financial
ratios can be used to analyze trends and to compare the firm's financials to those of other
firms.
List of MFI’s and their key Ratios
Liquidity Ratios
These ratios actually show the relationship of a firm‗s cash and other current assets to its
current liabilities. Two ratios are discussed under Liquidity ratios. They are:
1. Current ratio
2. Quick/ Acid Test ratio.
1. Current ratio: This ratio indicates the extent to which current liabilities are covered by
those assets expected to be converted to cash in the near future. Current assets normally
include cash, marketable securities, accounts receivables, and inventories. Current liabilities

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consist of accounts payable, short-term notes payable, current maturities of long-term debt,
accrued taxes, and other accrued expenses (principally wages).
Current Ratio=Current Assets/Current Liabilities.
Cost of Funds Ratio
Cost of Funds = Financial Expense on Funding Liabilities
(Average Deposits + Average Borrowings)
Trend: The Cost of Funds may indicate a level of maturity of the MFI. A decreasing Cost of
Funds ratio is generally positive. When Financial Expenses are adjusted to include free or
subsidized funding, the ratio will show the actual financial cost of funds needed to fund or
capitalize the MFI.
Debt to Equity
Debt/Equity = Liabilities____
Equity
Trend: An increasing debt/equity ratio indicates the MFI’s capacity to attract debt funding
based on its capital strength of its own equity. Too low a ratio might indicate that the MFI is
not maximizing its equity base. Too high a factor may be risky for investors, and may spell
cash flow challenges during difficult times
Liquid Ratio
Liquid Ratio = Cash + Trade Investments_____
(Demand Deposits + short-term Time Deposits + Short-term
Borrowings + Interest Payable on Funding Liabilities + Accounts Payable
And other Short-term Liabilities)
Trend: No single ratio or trend provides the “correct” or “adequate” means to monitor cash
levels. Managers must have clear policies in place to ensure that cash is available when
needed for all MFI operations and activities Banking requirements and risk tolerance will
affect the ratio...
Risk Coverage Ratio
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Risk Coverage Ratio = ______Allowance for Loan Losses______
Portfolio at Risk over 30 days
Trend: A fairly constant, stable ratio is desired. Sudden changes usually indicate a
deterioration or improvement in portfolio quality or an excess or shortage in the Allowance
for Loan Losses account.
Capacity of MFIs
It is now recognized that widening and deepening the outreach of the poor through MFIs has
both social and commercial dimensions. Since the sustainability of MFIs and their clients
complement each other, it follows that building up the capacities of the MFIs and their
primary stakeholders are pre-conditions for the successful delivery of flexible, client
responsive and innovative microfinance services to the poor. Here, innovations are important
both of social intermediation, strategic linkages and new approaches centered on the
livelihood issues surrounding the poor, and the re-engineering of the financial products
offered by them as in the case of the Bank Partnership model.
Bank Partnership Model:
This model is an innovative way of financing MFIs. The bank is the lender and the MFI acts
as an agent for handling items of work relating to credit monitoring, supervision and
recovery. In other words, the MFI acts as an agent and takes care of all relationships with the
client, from first contact to final repayment.
The model has the potential to significantly increase the amount of funding that MFIs can
leverage on a relatively small equity base.
A sub - variation of this model is where the MFI, as an NBFC, holds the individual loans on
its books for a while before securitizing them and selling them to the bank. Such refinancing
through securitization enables the MFI enlarged funding access. If the MFI fulfils the ―true
sale‖ criteria, the exposure of the bank is treated as being to the individual borrower and the
prudential exposure norms do not then inhibit such funding of MFIs by commercial banks
through the securitization structure.
Banking Correspondents
The proposal of ―banking correspondents‖ could take this model a step further extending it to
savings. It would allow MFIs to collect savings deposits from the poor on behalf of the bank.
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It would use the ability of the MFI to get close to poor clients while relying on the financial
strength of the bank to safeguard the deposits. Currently, RBI regulations do not allow banks
to employ agents for liability - i.e. deposit - products. This regulation evolved at a time when
there were genuine fears that fly-by-night agents purporting to act on behalf of banks in
which the people have confidence could mobilize savings of gullible public and then vanish
with them. It remains to be seen whether the mechanics of such relationships can be worked
out in a way that minimizes the risk of misuse.
Service Company Model:
In this context, the Service Company Model developed by ACCION and used in some of the
Latin American Countries is interesting. The model may hold significant interest for state
owned banks and private banks with large branch networks. Under this model, the bank
forms its own MFI, perhaps as an NBFC, and then works hand in hand with that MFI to
extend loans and other services. On paper, the model is similar to the partnership model: the
MFI originates.
MFI Model
Under this model, the bank forms its own MFI, perhaps as an NBFC, and then works hand in
hand with that MFI to extend loans and other services. On paper, the model is similar to the
partnership model: the MFI originates the loans and the bank books them. But in fact, this
model has two very different and interesting operational features:
The MFI uses the branch network of the bank as its outlets to reach clients. This allows the
client to be reached at lower cost than in the case of a stand–alone MFI. In case of banks
which have large branch networks, it also allows rapid scale up. In the partnership model,
MFIs may contract with many banks in an arms length relationship. In the service company
model, the MFI works specifically for the bank and develops an intensive operational
cooperation between them to their mutual advantage.
The Partnership model uses both the financial and infrastructure strength of the bank to create
lower cost and faster growth. The Service Company Model has the potential to take the
burden of overseeing microfinance operations off the management of the bank and put it in
the hands of MFI managers who are focused on microfinance to introduce additional
products, such as individual loans for SHG graduates, remittances and so on without
disrupting bank operations and provide a more advantageous cost structure for microfinance.
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For NGOs Model
There are a large number of NGOs that have undertaken the task of financial intermediation.
Majority of these NGOs are registered as Trust or Society. Many NGOs have also helped
SHGs to organize themselves into federations and these federations are registered as Trusts or
Societies. Many of these federations are performing non-financial and financial functions like
social and capacity building activities, facilitate training of SHGs, undertake internal audit,
promote new groups, and some of these federations are engaged in financial intermediation.
The NGO MFI varies significantly in their size, philosophy and approach. Therefore these
NGOs are structurally not the right type of institutions for undertaking financial
intermediation activities, as the byelaws of these institutions are generally restrictive in
allowing any commercial operations. These organizations by their charter are non-profit
organizations and as a result face several problems in borrowing funds from higher financial
institutions. The NGO MFIs, which are large in number, are still outside the purview of any
financial regulation. These are the institutions for which policy and regulatory framework
would need to be established.
Along with developing saving and credit facilities, the NGOs engage in:
(1) Providing Basic Education.
(2) Developing a sense of Health and Hygiene.
(3) Encourage family planning.
(4) Creating Awareness about environment protection.
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(5)Most important, nurturing an environment of gender equality. These activities are the
rudiments of sustained economic development.
Basically, the MFIs in India are of three categories:
(i) Not for profit MFI, which include the NGOs?
(ii) Mutual Benefit MFIs, which include mutually-aided co-operative credit.
(iii) For Profit MFIs, which include the Non-Banking Financial Companies (NBFC)?
Non-Profit Companies as MFIs:
Many NGOs felt that combining financial intermediation with their core competency activity
of social intermediation is not the right path. It was felt that a financial institution including a
company set up for this purpose better does banking function. Further, if MFIs are to
demonstrate that banking with the poor is indeed profitable and sustainable, it has to function
as a distinct institution so that cross subsidization can be avoided. On account of these
factors, NGO MFIs are of late setting up a separate Non-Profit Companies for their micro
finance operations. The MFI is prohibited from paying any dividend to its members. In terms
of Reserve Bank of India‘s Notification dated 13 January 2000, relevant provisions of RBI
Act, 1934 as applicable to NBFCs will not apply for NBFCs .
(i)

licensed under Section 25 of Companies Act, 1956,

(ii)

providing credit not exceeding Rs. 50,000 ($1112) for a business enterprise and
Rs. 1, 25,000 ($2778) for meeting the cost of a dwelling unit to any poor person,
and,

(iii)

not accepting public deposits

Mutual Benefit MFIs: The State Cooperative Acts did not provide for an enabling
framework for emergence of business enterprises owned, managed and controlled by the
members for their own development. Several State Governments therefore enacted the
Mutually Aided Co-operative Societies (MACS) Act for enabling promotion of self-reliant
and vibrant co-operative Societies based on thrift and self-help. MACS enjoy the advantages
of operational freedom and virtually no interference from government because of the
provision in the Act that societies under the Act cannot accept share capital or loan from the
State Government. Many of the SHG federations, promoted by NGOs and development
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agencies of the State Government, have been registered as MACS. Reserve Bank of India,
even though they may be providing financial service to its members, does not regulate
MACS.
For Profit MFIs: Non Banking Financial Companies (NBFC) are companies registered
under Companies Act, 1956 and regulated by Reserve Bank of India. Earlier, NBFCs were
not regulated by RBI but in 1997 it was made obligatory for NBFCs to apply to RBI for a
certificate of registration and for this certificate NBFCs were to have minimum Net Owned
funds of Rs 25 lakhs and this amount has been gradually increased. RBI introduced a new
regulatory framework for those NBFCs who want to accept public deposits. All the NBFCs
accepting public deposits are subjected to capital adequacy requirements and prudential
norms. There are only a few MFIs in the country that are registered as NBFCs. Many MFIs
view NBFCs more preferred legal form and are aspiring to be NBFCs but they are finding it
difficult to meet the requirements stipulated by RBI. The number of NBFCs having exclusive
focus on MF is negligible.

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CAPITAL REQUIREMENTS
NGO-MFIs, non-profit companies‘ MFIs, and mutual benefit MFIs are regulated by the
specific act in which they are registered and not by the Reserve Bank of India. These are
therefore not subjected to minimum capital requirements, prudential norms etc. NGO MFIs to
become NBFCs are required to have a minimum entry capital requirement of Rs. 20 million
($ 0.5 million). As regards prudential norms, NBFCs are required to achieve capital adequacy
of 12% and to maintain liquid assets of 15% on public deposits.
Foreign Investment
Foreign investment by way of equity is permitted in NBFC MFIs subject to a minimum
investment of $500,000. In view of the minimum level of investment, only two NBFCs are
reported to have been able to raise the foreign investment. However, a large number of NGOs
in the development - empowerment are receiving foreign fund by way of grants. At present,
over Rs.40, 000 million ($ 889 million) every year flows into India to NGOs for a whole
range of activities including microfinance. In a way, foreign donors have facilitated the entry
of NGOs into micro finance operations through their grant assistance.
Deposit Mobilization
Not for profit MFIs are barred, by the Reserve Bank of India, from mobilizing any type of
savings. Mutual benefit MFIs can accept savings from their members. Only rated NBFC
MFIs rated by approved credit rating agencies are permitted to accept deposits. The quantum
of deposits that could be raised is linked to their net owned funds.
Borrowings
Initially, bulk of the funds required by MFIs for on lending to their clients was met by apex
institutions like National Bank for Agriculture and Rural Development, Small Industries
Development Bank Of India, and, Rashtiya Mahila Kosh. In order to widen the range of
lending institutions to MFIs, the Reserve Bank of India has roped in Commercial Banks and
Regional Rural Banks to extend credit facilities to MFIs since February 2000. Both public
and private banks in the commercial sector have extended sizeable loans to MFIs at interest
rate ranging from 8 to 11 per cent per annum. Banks have been given operational freedom to
prescribe their own lending norms keeping in view the ground realities. The intention is to
augment flow of micro credit through the conduit of MFIs. In regard to external commercial
borrowings (ECB) by MFIs, not-for-profit MFIs are not permitted to raise ECB. The current
policy effective from 31 January 2004, allows only corporate registered under the Companies
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Act to access ECB for permitted end use in order to enable them to become globally
competitive players.
Interest Rates
The interest rates are deregulated not only for private MFIs but also for formal baking sector.
In the context of softening of interest rates in the formal banking sector, the comparatively
higher interest rate (12 to 24 per cent per annum) charged by the MFIs has become a
contentious issue. The high interest rate collected by the MFIs from their poor clients is
perceived as exploitative. It is argued that raising interest rates too high could undermine the
social and economic impact on poor clients. Since most MFIs have lower business volumes,
their transaction costs are far higher than that of the formal banking channels. The high cost
structure of MFIs would affect their sustainability in the long run.
Collateral requirements
All the legal forms of MFIs have the freedom to waive physical collateral requirements from
their clients. The credit policy guidelines of the RBI allow even the formal banks not to insist
on any type of collateral and margin requirement for loans up to Rs 50,000 ($1100).
Regulation & Supervision
India has a large number of MFIs varying significantly in size, outreach and credit delivery
methodologies. Presently, there is no regulatory mechanism in place for MFIs except for
those that are registered as NBFCs. As a result, MFIs are not required to follow standard rule
and it has allowed many MFIs to be innovative in its approach particularly in designing new
products and processes. But the flip side is that the management and governance of MFIs
generally remains weak, as there is no compulsion to adopt widely accepted systems,
procedures and standards. Because the sector is unregulated, not much is known about their
internal health.
Following Committees have examined the road map for regulation and supervision of
MFIs
Task Force (appointed by NABARD) Report on Regulatory and Supervision Framework for
MFIs, 1999. (Kindly see publications Section for a complete report Working Group
(constituted by Government of India) on Legal & Regulation of MFIs, 2002 Informal Groups
(appointed by RBI) on Micro Finance which studied issues relating to
(i)

Structure &Sustainability,

(ii)

Funding

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(iii)

Regulations and

(iv)

Capacity Building, 2003

Advisory Committee (appointed by RBI) on flow of credit to agriculture and related activities
from the Banking System, 2004.
The Committee observed that while a few of the MFIs have reached significant scales of
outreach, the MFI sector as a whole is still in evolving phase as is reflected in wide debates
ranging around (i) desirability of NGOs taking up financial intermediation, (ii) unproven
financial and organizational sustainability of the model, (iii) high transaction costs leading to
higher rates of interest being charged to the poor clients, (iv) absence of commonly agreed
performance, accounting and governance standards, (v) heavy expectations of low cost funds,
including equity and the start up costs, etc.
The current debate on development of a regulatory system for the MFIs focuses on three
stages. Stage one - to make the MFIs appreciate the need for certain common performance
standards, stage two - making it mandatory for the MFIs to get registered with identified or
designated institutions and stage three - to encourage development of network of MFIs which
could function as quasi Self-Regulatory Organizations (SROs) at a later date or identifying a
suitable organization to handle the regulatory arrangements.
The Committee recommended that while the MFIs may continue to work as wholesalers of
microcredit by entering into tie-ups with banks and apex development institutions, more
experimentation have to be done to satisfy about the sustainability of the MFI model. Such
experimentation needs to be encouraged in areas where banks are still not meeting adequate
credit demand of the rural poor.
In regard to offering thrift products, the Committee felt that, while the NGO-MFIs can
continue to extend micro credit services to their clients, they could play an important role in
facilitating access of their clients to savings services from the regulated banks. As regards
allowing NGO-MFIs to access deposits from public / clients, the Committee considers that in
view of the need to protect the interests of depositors, they may not be permitted to accept
public deposits unless they comply with the extant regulatory framework of the Reserve Bank
of India. As no depositors' interest is involved where they do not accept public deposits, the
Reserve Bank of India need not regulate MFIs.
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As regards the high interest rates being charged by the MFIs, the Committee felt that the
lenders to MFIs may ensure that these institutions adopt a ‗cost-plus- reasonable-margin‘
approach in determining the rates of interest on loans to clients.
Development Fund
Micro Finance Development and Equity Fund (MFDEF) – Structure and Guidelines
During 2005-06, Government of India has decided to redesign ate the existing MFDF as
microfinance Development and Equity Fund (MFDEF). It has also been decided to enhance
the fund size from the existing Rs100 crore to Rs 200 crore. The additional amount of Rs 100
crore will be contributed by Reserve Bank of India, NABARD and the commercial banks in
the same proportion as earlier (40:40:20).
Objectives
The objective of the redesignated Fund is to facilitate and support the orderly growth of the
microfinance sector through diverse modalities for enlarging the flow of financial services to
the poor particularly for women and vulnerable sections of society consistent with
sustainability.
Activities to be supported from out of the MFDEF
The Fund will be utilized to support interventions to eligible institutions and
stakeholders. The components of assistance will include, inter alia, the following purposes:
Capacity Building
1. Training of SHGs and other groups for livelihood, skill up gradation and micro
enterprise development.
2. Capacity building of staff of institutions involved in microfinance promotion such as
Banks, NGOs, government departments, NABARD, etc.
3. Capacity building of MFIs.

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Funding Support
1. Contributing equity/other forms of capital support to MFIs, service providers, etc.
2. Providing financial support for start-up and on-lending for microfinance activities.
3. Supporting Self Help Promotion initiatives of banks and other SHPIs.
4. Meeting on a selective basis the operational deficit of financial intermediary NGOs/MFIs
at the start up stage.
5. Rating of MFIs and self regulation.
MIS
1. Supporting systems management in regard to MIS, accounting, internal controls,
audits and impact assessment.
2. Building an appropriate data base and supporting development thereof. Regulatory &
Supervisory Framework.
3. Recommending regulatory and supervisory framework based on an on-going review.
Studies & Publications
1. Commissioning studies, consultancies, action research, evaluation studies, etc,
relating to the sector.
2. Promoting seminars, conferences and other mechanisms for discussion and
dissemination.
3. Granting support for research.
4. Documentation, Publication and dissemination of MF literature.
5. Any other activities recommended by the Advisory Board to Fund.
Eligible Institutions
Following types of structures, community based organizations and institutions, would be
eligible for support from the Fund:

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1. Training: SHGs, CBOs, NGOs/VAs, Banks, MFIs, NABARD, Training
Establishments, networks, service providers.
2. Funding support: NGOs/VAs, CBOs, MFIs, and Banks.
3. MIS: SHGs, NGOs/VAs, Banks, MFIs, NABARD.
4. Regulatory and Supervisory Framework: Banks, MFIs, SROs, NGOs /VAs / MFI
Networks, NABARD.
5. Studies and Publications: Banks, MFIs, NABARD, Training and Research
Organizations, Academic institutions and Universities.
6. Any other organization as may be decided by the Advisory Board from time to
time.
Mode of Assistance
Mode of assistance from the Fund will include the following:
* Promotional support for training and other promotional measures.
* Loans and advances including soft loans
* Revolving Fund Assistance (RFA) to NGOs/ MFIs.
* Equity and quasi equity support to MFIs.
* Administrative subsidies and grants.
* Administering Charges.
Advisory Body to MFDEF:
The Advisory Board shall guide and render advice on the various aspects relating to the
micro finance sector. The Board may determine its own procedures for day-to-day working
including constitution of committees, task forces etc, for examination of various issues. The
advisory board will meet at such intervals as deemed necessary but in any case once in a
quarter to review the status and progress of outflow and to render policy advice in respect of
orderly growth and development of the sector.

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NABARD's Support to microfinance Institutions (MFIs)
Realizing the importance of MFIs in the delivery of financial services to the poor and their
potential for expansion of services in remote and lesser-banked areas, NABARD has been
extending technical and fund support to this sector. Some of the concerns that necessitated
NABARD to commence this support in 1993 were: 1) the need to provide timely credit to the
poor in under banked regions and ii) to further improve the outreach of rural credit delivery
system through alternate credit delivery mechanisms.
NABARD's support is being provided to various forms of microfinance institutions covering
MFIs, second tier MF lending institutions, Grameen bank replicators, NGO-MFIs, SHG
Federations etc. NABARD provides loan funds in the form of Revolving Fund Assistance
(RFA) to NGO-MFIs on a very selective basis. The RFA is generally provided for a period of
5 to 6 years and is necessarily to be used for on lending to mF clients (SHGs or individuals).
In addition, the agencies are also sanctioned, on a case-to-case basis, grant assistance for
partly meeting the salary of field level staff, infrastructure development and operational
deficits during the initial years.
Cumulatively, as at the end of June 2004, Rs 26.98 crore (Rs 269.80 million) has been
sanctioned as RFA to 31 NGO-MFIs and Rs. 0.58 crore (Rs 5.8 million) has been sanctioned
as grant to various NGOs. The amount excludes Rs 3.4 million sanctioned under SHG Post
Office linkage programme in Tamilnadu.
During the year 2003-04, loan support of Rs. 84 million was sanctioned to two
agencies viz.
1) Friends of World Women Banking, India (Rs. 74 million) for on-lending to small
NGOs &
2) Kalanjiam Development Financial Services-a section 25 company promoted by
DHAN Foundation (Rs 10 million) for on lending to SHGs.
NABARD also provides technical support in the form of capacity building of staff of MFIs
and also bankers in appraisal of MFIs for providing wholesale resource support. Since 2002,
training programmes on "Appraisal of MFIs" are being conducted through Bankers Institute
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of Rural Development (BIRD), Lucknow. These training programmes are intended to equip
the stakeholders to appreciate the nuances in financing NGO-MFIs and also enhance the flow
of loan able funds from mainstream financial Institutions like banks. Specially designed
capacity building programmes are also being organized for Chief Executives & other staff of
NGOs on promotion as well as managing of self help groups on a regular basis through our
regional offices, in association with reputed resource NGOs & training establishments.
Success Factors of Micro-Finance in India
Over the last ten years, successful experiences in providing finance to small entrepreneur and
producers demonstrate that poor people, when given access to responsive and timely financial
services at market rates, repay their loans and use the proceeds to increase their income and
assets. This is not surprising since the only realistic alternative for them is to borrow from
informal market at an interest much higher than market rates.
Community banks, NGOs and grass root savings and credit groups around the world have
shown that these microenterprise loans can be profitable for borrowers and for the lenders,
making microfinance one of the most effective poverty reducing strategies.
Problems for Alternative Micro-Finance Institutions
The main aim with which the alternative MFIs have come up is to bridge the increasing gap
between the demand and supply. A vast majority of them set up as NGOs for getting access
to funds as, the existing practices of mainstream financing institutions such as SIDBI and
NABARD and even of the institutions specially funding alternatives, such RMK and FWWB,
is to fund only NGOs, or NGO promoted SHGs. As a result, the largest incentive to enter
such services remains through the nonprofit route. The alternative finance institutions also
have not been fully successful in reaching the needy.
There are many reasons for this:
*Financial problems leading to setting up of inappropriate legal structures.
*Lack of commercial orientation.
*Lack of proper governance and accountability.
*Isolated and scattered.

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Future of Micro Finance
Microfinance in India is in crisis because of the backlash against lenders in the southern state of
Andhra Pradesh, the heart of the industry, where politicians have ordered borrowers not to repay
their debts. The industry also faces an uncertain regulatory future with the state introducing new
restrictions on lenders and Finance Minister Pranab Mukherjee saying last week he would formulate
new rules to govern the industry once he receives a report from a committee of the Reserve Bank of
India.

The industry needs to move past a single-minded focus on scale, expand the depth and breadth of
products and services offered, and focus on the double bottom line and over indebtedness to
effectively address the risks facing the industry.
Estimated that in next five years, 65% of the poor people will have excess to MFIs. Many Pvt. Banks
and Foreign Banks would enter this business segment, because of very low NPAs.

Estimated that 5 % of the number of people below the poverty line will get reduced in the
next 5 years.(World Bank report).
These agents contact several borrowers, thus expanding the reach of ICICI Bank at a low
cost. Taking the FSC initiative further, ICICI Bank plans to provide farmers credit from sugar
companies, seed companies, dairy companies, NGOs, micro-credit institutions and food
processing industries.
SIG has been involved in a project in the southern state of Tamil Nadu to find out how
wireless technology can be applied in the development of low cost models of banking.
Another plan to increase the reach in rural areas is to launch mobile ATM services. ICICI
Bank branded trucks have started carrying ATMs through a number of villages.
While these deaths are tragic, and the way that lenders are going about collecting payments is
wrong, the root of the problem is not microfinance and not the interest rates. The problem lies
in the way that MFI‘s are going about their business. The system itself is sound, and but what
must occur is a restricting of the employee base.
If such abuse continues to persist, there will not be a future for microfinance. In order for a
peaceful, progressive future, MFI‘s must strictly enforce their lender policies, making sure to
eliminate agent threats as mentioned in the WSJ.
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Thus, restrictions are not necessary, but a restructuring of the microfinance industry is in
strong demand. It will only be until microfinance policy is solidified and agreed upon by the
local and national legislatures that MFI‘s regain the trust and reputation they once held as an
institution of progress, not abuse.
A) The Future: Microfinance expansion over the next decade can be expected to be an
extension of what has been achieved so far while overcoming the hurdles that have
been posing difficulty in effective microfinance operation and its expansion.
There may be several participants in this process and their participation may be seen in the
following forms.
Existing microfinance institutions can expand their operations to areas where there are no
microfinance programs.
More NGOs can incorporate microfinance as one of their programs. In places where there are
less micro finance institutions, the government channels at the grassroots level may be used
to serve the poor with microfinance.
Postal savings banks may participate more not only in mobilizing deposits but also in
providing loans to the poor and on lending funds to the MFIs.
More commercial banks may participate both in microfinance wholesale and retailing. They
many have separate staff and windows to serve the poor without collateral.
International NGOs and agencies may develop or may help develop microfinance programs
in areas or countries where micro financing is not a very familiar concept in reducing
poverty.
Considering that the majority of the 360 million poor households (urban and rural) lack
access to formal financial services, the numbers of customers to be reached, and the variety
and quantum of services to be rovided are really large. It is estimated that 90 million farm
holdings, 30 million non-agricultural enterprises and 50 million landless households in India
collectively need approx US$30 billion credit annually. This is about 5% of India's GDP and
does not seem an unreasonable estimate.

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However, 80% of the financial sector is still controlled by public sector institutions.
Competition, consolidation and convergence are all being discussed to improve efficiency
and outreach but significant opposition remains.
Many private and foreign banks have unveiled their plans to enter the Indian microfinance
sector because of its very low NPAs and high repayment rate of more than 95% in spite of
offering loans without any collateral security.
Microfinance is not yet at the centre stage of the Indian financial sector. The knowledge,
capital and technology to address these challenges however now exist in India, although they
are not yet fully aligned. With a more enabling environment and surge in economic growth,
the next few years promise to be exciting for the delivery of financial services to poor people
in India
Development of Small-Scale Enterprises through microfinance will not only increase the outreach
but will also help the generation of more employment and income for the poor. It is expected that in
the following years there will be considerable deepening of microfinance in this direction along with
simultaneous drives to reach and serve the poorest of the poor.

But the crux of the discussion is that, if the over excess involvement of the government
would be there in the Micro Finance sector, than the growth of the Micro Finance won‗t
much possible. The Govt. involvement should limited to the important decisions only, but not
to interfere in each and every matter of the management.

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Top 50 Microfinance Institutions in India
The above report includes detailed profiles and ratings of India’s top Microfinance
Institutions: CRISIL List: Top 50 Microfinance Institutions in India by Loan Amount
Outstanding for 2010.
1. SKS Microfinance Ltd (SKSMPL).
2. Spandana Sphoorty Financial Ltd (SSFL).
3. Share Micro fin Limited (SML)4. Asmitha Micro fin Ltd (AML).
5. Shri Kshetra Dharmasthala Rural Development Project (SKDRDP).
6. Bhartiya Samruddhi Finance Limited (BSFL).
7. Bandhan Society.
8. Cashpor Micro Credit (CMC).
9. Grama Vidiyal Micro Finance Pvt Ltd (GVMFL).
10. Grameen FinancialServices Pvt Ltd (GFSPL).
11. Madura Micro Finance Ltd (MMFL).
12. BSS Microfinance Bangalore Pvt Ltd (BMPL).
13. Equitas Micro Finance India P Ltd (Equitas).
14. Bandhan Financial Services Pvt Ltd (BFSPL).
15. Sarvodaya Nano Finance Ltd (SNFL).
16. BWDA Finance Limited (BFL).
17. Ujjivan FinancialServices Pvt Ltd (UFSPL).
18. Future Financial Services Chittoor Ltd (FFSL).
19. ESAF Microfinance & Investments Pvt. Ltd (EMFIL).
20. S.M.I.L.E Microfinance Limited.
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21. SWAWS Credit Corporation India Pvt Ltd (SCCI).
22. Sanghamithra Rural Financial Services (SRFS).
23. Saadhana Micro fin.
24. Gram Utthan Kendrapara.
25. Rashtriya Seva Samithi (RASS).
26. Sahara Utsarga Welfare Society (SUWS).
27. Sonata Finance Pvt Ltd (Sonata).
28. Rashtriya Gramin Vikas Nidhi.
29. Arohan Financial Services Ltd (AFSL).
30. Janalakshmi Financial Services Pvt Ltd (JFSPL).
31. Annapurna Financial Services Pvt Ltd.
32. Hand in Hand (HiH).
33 Payakaraopeta Women‘s Mutually Aided Co-operative Thrift and Credit Society
(PWMACTS)
34 Aadarsha Welfare Society(AWS)
35 Adhikar
36 Village Financial Services Pvt Ltd (VFSPL)
37 Sahara Uttarayan
38 RORES Micro Entrepreneur Development Trust(RMEDT)
39 Centre for Rural Social Action (CReSA)
40 Indur Intideepam Federation Ltd (IIMF).
41 Welfare Organization for MultipurposeMass Awareness Network (WOMAN)
42 Pragathi Mutually Aided Cooperative Credit and Marketing Federation Ltd(PMACS)
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43 Indian Association for Savings and Credit(IASC)
44 Sewa Mutually Aided Cooperative Thrift Societies Federation Ltd (Sewa)
45 Initiatives for Development Bangalore, Foundation (IDF)
46 Gandhi Smaraka Grama Seva Kendram (GSGSK)
47 Swayamshree Micro Credit Services (SMCS)
48 ASOMI
49 Janodaya Trust
50 Community Development Centre (CDC)

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MICROFINANCE INDIA SUMMIT 2010
Over the last six years, the Microfinance India Summit, organized by ACCESS Development
Services, has established itself as an international conference dedicated to Indian
microfinance. It has become the single most important platform for sharing the Indian
experience, unique as it is, with a global audience. At the same time, it also provides an
avenue to learn about international trends and best practices for adaptation by the Indian
community of practitioners. Policy makers, practitioners, promoters, academics, researchers
and thought leaders share their experiences on various panels, and about 1000 delegates from
both within and outside the country participate in the Summit. It bridges the unnecessary
hiatus between models and methodologies and helps to build consensus on the critical
challenges and issues. In the past, the Summit themes have helped in focusing on key issues
including "Inclusion, Innovation and Impact" (2005), "Urban Microfinance" (2006),
"Formal Financial Institutions - the challenges of depth and breadth" (2007), "The
Poor First" (2008) and "Doing good and doing well- The need for balance" (2009).
The microfinance India Summit 2010 will be held on November 15-16, 2010 at Hotel
Ashok, New Delhi. The over-arching theme for this year's Summit is "Mission of
Microfinance - Need to Reflect and Reaffirm". The Summit sessions will focus on current
trends

and

issues

relating

to

sustainability,

transparency,

social

performance,

commercialization of the sector, client protection, among others.

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MICROFINANCE INDIA SUMMIT 2011
Microfinance India Summit, an international event, annually organized by ACCESS, brings
the sector together to identify impediments to its organised growth, analyse trends and help to
construct a vision for its future growth and raises topical issues for discussion and debate.
The Eighth Microfinance India Summit will be organised between December 12-13, 2011 at
Hotel Ashok in New Delhi.
Summit 2011 will focus on implications of new regulation, on current trends and issues
relating to transparency, client protection, and provision of remittance services, micro
housing, micro insurance, impact assessment of microfinance and renew focus on Self Help
Groups as means of social empowerment and for delivery of financial services.
The Summit will feature plenary sessions on:
SHG Version 2: The New Surge
Microfinance in a Regulatory Regime: What will change?
Responsible Finance
National Rural Livelihoods Mission – Structures for Financial Intermediation
Aadhar - The basis of Financial Inclusion (session on the Universal Identification
Scheme)
The Summit is also a platform for release of important sectoral documents. As per
convention, State of the sector Report on Microfinance 2011 will be released on the inaugural
day. We will also release the following additional reports and design sessions based on
research studies to guide discussions at the Summit 2011 with sound data and analysis:
Microfinance India Social Performance Report – The Report is envisaged as an annual
publication, on the lines of the State of the Sector Report, that will collate and present
comprehensive research based analysis and documentation of Social Performance data and
initiatives on social performance of microfinance players in the country. Two Decades of Self
Help Groups in Microfinance: Time for a New Direction? – The Report will undertake a
comprehensive stocktaking accomplishments and shortcomings of SHGs and community
institutions built upon them; and to plot their progress alongside global developments in the
field of microfinance and other developmental initiatives.
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RECOMMENDATION & SUGGESTION
Under mention are the few recommendations and suggestions, which I felt during my
project on
Micro Finance is:-

a. The concept of Micro Finance is still new in India. Not many people are aware the
Micro Finance Industry. So apart from Government programmers, we the people
should stand and create the awareness about the Micro Finance.
b. There are many people who are still below the poverty line, so there is a huge demand
for MFIs in India with proper rules and regulations.
c. There is huge demand and supply gap, in money demand by the poor and supply by
the MFIs. So there need to be an activate participation by the Pvt. Sector in this
Industry.
d. One strict recommendation is that there should not over involvement of the
Government in MFIs, because it will stymie the growth and prevent the others MFIs to
enter.
e. According to me the Micro Loan should be given to the women only, Because by this
only, MFIs can maintain their repayment ratio high, without any collaterals.
f. Many people say that the interest rate charge by the MFIs is very high and there
should be compelled cap on it. But what I felt during my personal survey, that the high
rates are justifiable. Now by this example we will get agree.

Suppose a big commercial bank gives Rs 1 million to an individual and in the same way
a MFI gives Rs 100 to 10.000 customers. So it’s obvious that man power cost and
operating cost are higher for the MFIs. So according to me rates are justifiable, But
with limitations.

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ACRONOMY

KDS MSPL

-

KDS Micro credit services Private Limited.

OM

-

Operation Manager

CED

-

Chief Executive Director

H/O

-

Head Office

HRD

-

Human Resource Development

MF

-

Micro finance

MFI

-

Micro finance Institute

MIS

-

Management Information System

NBFC

-

Non Banking Financial Company

NGO

-

Non Government Organization

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CONCLUSION
Microfinance has a long way despite doubts expressed and criticism launched about its
viability, impact, and poverty fighting capacity. There should, however, be no room for
complacency. The task of building a poverty-free world is yet to be finished. There are
still over 1.2 billion people living in extreme poverty on this planet. They are not living
in one country or region but spread all over the world. The last decade has witnessed an
impressive growth of microfinance; lack of funding is still considered a major obstacle
in the way of its growth. However, it is encouraging that the situation is changing. Given
the experiences of large and fast growing the last decade has witnessed an impressive
growth of microfinance; lack of funding is still considered a major obstacle in the way
of its growth. However, it is encouraging that the situation is changing. Given the
experiences of large and fast growing Microfinance, there are lessons for others who
want to increase their outreach and operate on a sustainable basis.
Fortunately, there is an increasing awareness about the power of microfinance, and the
need to support its growth. Many players have committed themselves to its promotion.
Governments are taking an increasing interest in it. More banks, both national and
international are coming forward with different support packages. NGO-MFI
partnerships are on the increase. New instruments are being used to solve the problem
of funding. It is expected that in the coming years more ideas, innovations, cost saving
devices, and players will continue to reinforce the microfinance movement and increase
its expansion.
At the end I would conclude that, Micro Finance Industry has the huge potential to
grow in future, if this industry grows then one day we‘ll all see the new face of India,
both in term of high living standard and happiness.
One solution by which we all can help the poor people, i.e. in a whole year a medium
and a rich class people spends more than Rs 10,000 on them without any good reason.
Instead of that, by keeping just mere Rs, 3000 aside and donate that amount to the
MFIs, then at the end of the year the total amount in the hands of poor would be
(average 500 million people *Rs 3000)=Rs 1,500,000,000,000 . Just imagine where would
be India in next 10 years.

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Private MFIs in India, barring a few exceptions, are still fledgling efforts and are
therefore unregulated. Their outreach is uneven in terms of geographical spread. They
serve micro finance clients with varying quality and using different operating models.
Regulatory framework should be considered only after the sustainability of MFI model
as a banking enterprise for the poor is clearly established. Experimentation of MFI
model needs to be encouraged especially in areas where formal banks are still not
meeting adequate credit demand of the rural poor.

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BIBLIOGRAPHY
NEWSPAPERS/ MAGAZINES
 The Economic Times
 Business World

REPORTS
 Microfinance in India: A State of the Sector Report
 Rural Credit and Microfinance : An RBI Report

WEBSITES
 www.rbi.org.in
 www.wikipedia.org
 www.economictimes.com
 www.businessstandard.com
 www.dnaindia.com
 www.microfinanceinsight.com
 www.investopedia.com,
 www.books.google.com
 www.seepnetwork.org
 www.familiesinbusiness.net
 www.indiamicrofinance.com.
 www.elyserowe.com
 www.kdsmfi.org.

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