The document summarizes the emergence and growth of microfinance in India. It discusses how microfinance began informally in the early 1900s and became more formalized over time with the establishment of organizations to promote microfinance. It outlines the major developments in microfinance in India between the 1970s and today. These include the establishment of pioneering microfinance organizations like SEWA and the growth of microfinance institutions from the 2000s onward. The document also summarizes data showing tremendous growth in the number of microfinance clients served and loans disbursed among leading Indian MFIs between 2008-2010.

1. PAPER PRESENTATION ON
EMERGENCE AND FLOURISHMENT OF MICROFINANCE IN INDIA
PRESENTED BY
MRS.B.Ramya HariGanesan., M.F.C., M.PHIL.
RESEARCH SCHOLAR
19/83, Vakkil street,
RaNiPeT,
Vellore Dt.623401
IN
NATIONAL CONFERENCE ON
TRENDS IN BANKING & FINANCE
HELD ON
MARCH 26, 2012
BY
DEPARTMENT OF MANAGEMENT STUDIES
IN
SNS COLLEGE OF TECHNOLOGY
(AN NBA ACCREDITED AND ISO9001-2008CERTIFIED INSTITUTION)
(APP. AICTEAND AFFILIATED TO ANNA UNIVERSITY OF TECHNOLOGY, COIMBATORE)
SATHY MAIN ROAD, VAZHIYAMPALAYAMPIRUVU,
COIMBATORE-35.

2. EMERGENCE AND FLOURISHMENT OF MICROFINANCE IN INDIA
Introduction:
As our father of Nation Mahatma Gandhi’s wordings says,” AS YOU ARE UPLIFTING THE
POOR THEN YOU ARE UPLIFTING THE NATION”, Micro finance is a tool to attack poverty all
over the world.
Micro finance could be defined 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”

3. As we see poor people need finance to meet their day to day needs, but have very
low accessibility to approved finance sources. They meet their needs through exchanging
different forms of non-cash value typically include livestock, grains, jewelry, and precious
metals.
Micro finance is a best tool identified to finance low income households and it is
achieving its goal of alleviating poverty in India. This is illustrated below,
Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Deposits
(sum) — — — 0 4.23 0.00 4.07 20.12 34.10 52.68
Borrower
retention
rate — — — — — — — — — 76.13%
Assets
(sum) 27.47 50.05 74.31 138.98 213.88 377.75 596.16 486.92 938.74 966.59
Source:www.mixmarket.org/crossmarket-analysis
0
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
ASSETSVALUEINR
YEAR
Assets (sum)

4. Origin and Development of Microfinance in India:
Evolution of Microfinance in India:
 In 1904, Microfinance has been in practice for ages (though informally).Legal framework
for establishing the co-operative movement set up.
 In 1934, Reserve Bank of India Act provided for the establishment of the Agricultural
Credit Department.
 In 1969, Nationalisation of banks.
 In 1975, Regional Rural Banks created.
 In 1976,Grameen Bank, Yunus
 In 1982, NABARD established as an apex agency for rural finance.
 In 1995, Passing of Mutually Aided Co-op. Act in AP.
On 12th July 2002, Prime Minister Atal Behari Vajpayee outlined an eight point agenda
to push the economy on a growth path of eight percent during the 10th plan. Mr. Vajpayee
0
1000000
2000000
3000000
4000000
5000000
6000000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
DEPOSITSVALUEINR
Axis Title
Deposits (sum)

5. assured that it would be government’s Endeavour to ensure that “the poor and the
unorganized sector have access to savings, credit and insurance services”. This statement itself
is a great boost to the microfinance sector, as one can see the changing perception of the
people influencing the policies, toward it. However, it is still a beginning and to make the
sector vibrant, the efforts have to be still on.
So the birth of microfinance movement in India can be traced to 70's.The main aim of
the movement was to alleviate poverty by delivering financial services to the poor. The basic
idea was to enable poor to access the financial services so that poor can have an asset base
and initiate income generation activities.
The movement was initiated in India by the joint efforts of NGOs and CBOs. Self
Employed Women Association (SEWA) is considered one of the pioneers of the microfinance
movement in India. Over the years, the efforts of these organizations have proved that poor
are bankable.
Further, in the last two decades microfinance movement has gained a lot of
prominence all over the world as well as in India. We can divide microfinance movements in
India into two distinct phases. Phase I: from 1970's to 1991 and Phase II: from 1991 to the
present time. In the Phase II, formal financial sector in India also joined the microfinance
movement.
The MFIs operate under various legal forms.
 NGO MFIs – Registered under Societies Registration Act 1860 and / or Indian Trust Act
1880

6.  Co-operative MFIs – Registered under State Co-operative Societies Act or Mutually
Aided Co-operative Societies Act (MACS) or Multi-State Co-op. Societies Act, 2002
 NBFC MFIs under Section 25 of Companies Act, 1956 (Not for profit).NBFC MFIs
incorporated under Companies Act,1956 & registered with RBI
NABARD has taken various initiatives to support Micro Finance Institutions (MFIs) to
strengthen them as given below
1. Rating of Micro Finance Institutions (MFIs)
In order to identify, classify and rate Micro Finance Institutions (MFIs) and empower
them to function as intermediaries between the lending banks and the clients, NABARD had
introduced a scheme for providing financial assistance by way of grant to Commercial Banks,
Regional Rural Banks and Co-operative Banks to avail of the services of accredited rating
agencies for rating of MFIs.
Banks can avail the services of credit rating agencies viz. CRISIL, M-CRIL, ICRA, CARE
and Planet Finance for rating of MFIs.
2. Revolving Fund Assistance (RFA) to MFIs.
NABARD provides loan funds in the form of Revolving Fund Assistance (RFA), on a
very selective basis to MFIs. The RFA provided to these agencies is necessarily to be used for
on-lending to SHGs or individuals and the amount is to be repaid along with the service
charge within a stipulated period of 5 to 6 years.

7. 3. Capital / Equity Support to Micro Finance Institutions (MFIs)
In view of the announcements made by the Hon’ble Finance Minister in his Union
Budget 2005-06, a scheme called “Capital / Equity Support to MFIs from Micro Finance
Development and Equity Fund (MFDEF)” was announced under which capital/ equity support to
various types of MFIs would be provided by NABARD to enable them to leverage capital / equity
for accessing commercial and other funds from banks.
As an added advantage for this scheme in the Union Budget 2011-12 submitted on
28th Feb. of 2011, Honorable Finance Minister proposed to create in the course of the year,
‘India Microfinance Equity Fund’ of Rs 100 crore with SIDBI.
Top five MFIs in Outreach:
Micro finance
Institutions
In India
Clients (Million) Growth rate % Loans (billion) Growth rate %
2008 2009 2008 2009
SKS 1.88 3.52 87 7.81 24.6 214
Spandana 1.19 2.43 104 5.95 18.7 214
Share 1.29 1.50 16 7.28 12.2 67
Bandhan 0.76 1.45 91 2.78 5.3 91
Asmita 0.70 0.88 26 3.36 7.1 111
Source: CRISIL report 2010
About SKS:
SKS Microfinance Limited (SKS) is a non-banking finance company (NBFC), regulated by
the Reserve Bank of India. SKS claims its mission is to eradicate poverty by providing financial

8. services to the poor. The company operates across these 19 states of India: Andhra
Pradesh,Karnataka, Maharashtra, Orissa, Madhya Pradesh, Bihar, Uttar
Pradesh, Rajasthan,Uttaranchal, Himachal Pradesh, Haryana, West
Bengal, Jharkhand, Chhattisgarh, Gujarat,Kerala, Tamil Nadu, Punjab and Delhi.
According to a CRISIL Report on Top 50 Indian Microfinance Institutions (MFIs), SKS
Microfinance is the largest MFI in India in terms of number of borrowers, number of branches
and total loans.
About Spandana:
Spandana Foundation was started in 2005[1] as charitable trust to make a difference in
education, health care and better living of poor and needy. This trust has made significant
impact in these areas for the past five years. Spandana have helped lot of meritorious students,
supported for expensive surgeries for people with poor economic background. Spandana also
organized health camps and served thousands of rural Indians. The trust had developed action
plans to adopt government schools (Vidyalaya), Adopt poor students(Pratibha), Help the
homeless (Aashraya) and support poor people financially for health care(Cheyutha) thereby
making a difference in others lives.
About Share:
SHARE Microfinance Limited (SHARE) is a regulated Non-Banking Financial Company
(NBFC) providing financial and support services to the marginalized sections in society,
particularly to poor rural and urban women across India. Through its income generating loans
and business development services, SHARE reaches out to help these women build productive
microenterprises, thereby contributing to the development of sustainable communities.

9. About Bandhan:
Bandhan was set up to address the dual objective of poverty alleviation and women
empowerment. The micro finance activities are carried on by Bandhan financial services
Pvt.LTd.(BFSPL), incorporated under the companies Act ,1956 and also registered as a non
Banking Financial Company (NBFC) with the RBI.That apart,Bandhan is also engaged in
development work through its not for profit entity.They work to bring the forsaken hope in the
lives of the unprivileged section of the community .
About Asmita:
The Asmita Resource Centre for Women is an Indian NGO based in Andhra Pradesh. It
works to better the socio-economic status of women and communities in India as it strives to
"build a cadre of young women who are capable, efficient and feminist in perspective and who
can oppose violence and corruption with visions of an alternative". Through outreach programs,
research, publications, and media campaigns, the center creates a safe space in which women,
men, and youth can engage in critical dialog on and analysis of feminist issues and other critical
issues that the collective identifies.

10. BREAK UP OF INDIAN MICROFINANCE INSTITUTIONS
Source-CRISIL Ratings India MFI Institutions 2010

11. Growth in Micro Finance Top Five Institutions up to 2010:
Expansion of Consumer Base in Millions:
According to the CRISIL report up to 2010 the top Five micro finance institutions has a
rapid growth from March 2005 to March2010 which is reached from 1 million consumers to 6
million consumers on march 2010 which is 6 times growth. This is portrait in the below chart,
Comparative growth in Loans in Top Five MFI’s:
According to the CRISIL report up to 2010 the top Five micro finance institutions has a
rapid growth in giving loans to clients from March 2005 to March2010 which is reached from
100 million US dollars to 1000 million US dollars on march 2010 which is 10 times growth. This is
portrait in the below chart,
Growth Expected in Indian Micro Finance:
From the above reports from CRISIL there is a tremendous growth among micro finance
institutions for the past 5 years and according to a source Intellcap of projecting micro finance
portfolio growth up to 2012 saying that it will reach up to 3,50,000 million in Indian rupees. This
is illustrated in the below chart of projection from the real values on 2008 to projected values in
2012.

12. The Indian micro finance industry (MFI) would cross 11 crore borrowers and Rs.1, 35,000
crore ($30 billion) in loan portfolio by 2014 and will require a huge capital inflow both in debt
and equity. The report said that the growth is expected to come from underserved states that
are witnessing a flurry of activity, and also from a range of new financial and non-financial
products that are being introduced in the sector.
Indian microfinance institutions have grown at a spectacular rate between 2004 and
2009, with an average size portfolio increasing 107 per cent on a year on year basis, while
number of clients increasing 91 per cent. As of 2009, the industry had a client base of about two
crore and gross loan portfolio of Rs 11,734 crore.
Introduction of the bill is expected to create a definite regulatory framework for microfinance
institution
Micro finance Sector development and Regulation Bill, 2007
Introduced on 20th March 2007 Bill No.:41 of 2007.
A Bill to provide for promotion, development and orderly growth of the micro finance
sector in rural and urban areas for providing an enabling environment for ensuring universal
access to integrated financial services, especially to w omen and certain disadvantaged sections
of the people, and thereby securing prosperity of such areas and regulation of the micro finance
organisations not being regulated by any law for the time being in force and for matters
connected therewith or incidental thereto.

13. The salient features of the Bill are as follows:
 Entrust the function of development and regulation of the micro financial sector to the
National Bank for Agriculture and Rural Development(National Bank);
 Define various entities engaged in the activity of micro finance such as cooperative
societies, mutual benefit societies or mutually aided societies registered under any State
enactments or multi-State Cooperative societies registered under the Multi-State
Cooperative Societies Act 2002, societies registered under the Societies Registration Act
1860 or any other State enactments governing such societies and a trust created under
the Indian Trust Act 1882 or public trust registered under any State enactments. that will
be governed by the regulatory framework proposed to be set up;
 Define various categories of beneficiaries of micro financial services as eligible clients
including Self Help Groups (SHGs) or joint liability groups of such eligible clients.
 Provide for extending micro financial services to eligible clients by w ay of financial
assistance subject to ceilings to be prescribed and such other financial services as may
be specified by the National Bank;
 Provide for acceptance of thrift, i.e., savings eligible clients other than in the form of
current account or demand deposit account by micro financial organisations registered
by the National Bank, subject to such terms and conditions as may prescribed;
 Provide for constitution of Micro Finance Development Council to advise the National
Bank on formulation of policies, schemes and other measures required in the interest of
orderly growth and development of the micro finance sector;
 Provide for registration of Micro Finance Organisations to be permitted to collect thrift
from individual member of SHGs or through a group mechanism;
 Provide for creating of a reserve fund and maintenance of accounts and periodical
returns to be submitted by micro financial organisations;
 Provide for functions and powers of the National Bank in relation to thrift services and
micro financial services;
 Provide for constitution of Micro Finance Development and Equity Fund to be utilized
for the development of micro finance sector;

14.  Empower the National Bank to frame a scheme for appointment of one or more Micro
Finance Ombudsman for settlement of disputes between eligible clients and micro
finance organisations;
 To provide for offences and penalties for non-compliance with the regulatory
requirements of the Bill;
 To empower the Central Government to prescribe Rules for carrying out the purpose of
the Bill;
 To empower the National Bank to make regulations with the previous approval of the
Central Government for carrying out the purposes of the bill.
In continuation of the above Bill, Our honorable Finance Minister Mr.Pranab
Mukarjee in his 2012-13 Union Budget Proposes to move various bills in the Budget Session
of the Parliament related to Micro Finance, National Housing Bank, SIDBI, NABARD, Regional
Rural Banks, Indian Stamp etc. This attempts to roll forward the process of financial sector
legislative reforms.
Why there is a need for regulation?
 All NBFCs currently regulated by RBI under Chapters III-B, III-C and V.
 No separate category created for NBFCs operating in Microfinance Sector
 Separate category of NBFCs for MFIs such as NBFC-MFI needs to be setup.
Why Separate category of NBFCs needed?
 Borrowers in MFI sector represent a particularly vulnerable section of society NBFCs not
only compete among themselves they also compete with the SHG- Bank linkage
Programme.
 Credit to the MFI sector is an important plank in the scheme for financial inclusion
 Over 75% of the finance obtained by NBFCs operating in this sector is provided by Banks
& financial institutions like SIDBI.

15. Foreign direct investment and its impact on MFIs:
Indian MFIs can get foreign funds in the following ways:
1. Acceptance of Foreign Contribution:
Acceptance of foreign contribution by MFIs registered under the Societies Registration
Act 1860 is regulated by the Foreign Contribution (Regulation) Act 1976 (FCRA)
2. Foreign Direct Investment:
It is Applicable only to Section 25 companies and NBFCs which are allowed to
obtain FDI as equity.
3. NBFCs can obtain foreign capital in the form of equity subject to approval by the Foreign
Investment Promotion Board (FIPB)
Present foreign Investment in Micro finance:
 Private Equity(PE) Group Legatum and Aavishkaar Goodwell have invested $25 million
capital in “Share” which is a MFI
 Sequoia and Unitus, the Seattle-based company that invests in MFIs, have ploughed
$11.5 million into SKS Microfinance
 Morgan Stanley and Switzerland-based Blue Orchard raised $108 million from the issue
of a securitized bond backed by MFI loans. The money will be invested in 21 MFIs in
more than 10 countries including India.

16. Effects of Foreign Investment in Micro Finance:
Positive Impact:
 Private Equity (PE) funding from foreign players has provided the much needed ease of
funding for the MFI sector.
 Help Indian MFIs to improve upon their delivery system with the adaptation of good
management practices brought about by foreign players
 MFIs like SKS Microfinance have successfully come up with their IPO in the Capital
market rising $350 Million.
Negative Impact:
 Too aggressive on giving out loans to the poor with proper due diligence.Y V Reddy,
former Governor, RBI has compared this to the Sub Prime crisis lending of 2007-08 in the
US.
 Pressure of repayment on individuals leading to suicide cases in Andhra Pradesh, the
state having the largest number of MFIs
 Risk of Foreign Investors moving out with the slum in the MFI sector in 2010-11.

17. Impact of Micro finance in GDP growth of our country:
The data furnished below gives the factors that affect the GDP
percentage of our country.In this as we see Investment rate and Domestic
savings rate is expected to increase on 2011-12 by 0.3% and 0.2% respectively
which is an evidence for the impact of Micro finance in Investemnt and savings
by the poor people.
 Agriculture grew at 6.6% in 2010-11. This year’s monsoon is projected to be in the range of
90 to 96 per cent, based on which Agriculture sector is pegged to grow at 3.0% in 2011-12!
 Industry grew at 7.9% in 2010-11. Projected to grow at 7.1% in 2011-12
 Services grew at 9.4% in 2009-10. Projected to grow at 10.0% in 2011-12
 Investment rate projected at 36.4% in 2010-11 and 36.7% in 2011-12
 Domestic savings rate as ratio of GDP projected at 33.8% in 2010-11 & 34.0% in 2011-12
 Current Account deficit is $44.3 billion (2.6% of GDP) in 2010-11 and projected at $54.0
billion (2.7% of GDP) in 2011-12
 Merchandise trade deficit is $ 130.5 billion or 7.59% of the GDP in 2010-11 and projected at
$154.0 billion or 7.7% of GDP in 2011-12
 Invisibles trade surplus is $ 86.2 billion or 5.0% of the GDP in 2010-11 and projected at
$100.0 billion or 5.0% in 2011-12
 Capital flows at $61.9 billion in 2010-11 and projected at $72.0 billion in 2011-12
 FDI inflows projected at $35 billion in 2011/12 against the level of $23.4 billion in 2010-11
 FII inflows projected to be $14 billion which is less than half that of the last year i.e $30.3
billion
 Accretion to reserves was $15.2 billion in 2010-11. Projected at $18.0 billion in 2011-12
Source: Economic Outlook 2011-12

18. Challenges of Micro Finance in India:
 The future role MFIs might play in serving the poor is not clear, particularly with regard
to microfinance NGOs.
 It is difficult for NGOs to charge the same low interest rates as banks, yet it was pointed
out that NGOs might be better placed to disburse loans quickly and to do doorstep
lending, which reduces transaction costs for borrowers.
 Cap on Interest pricing to further limit the profitability of the sector
 Increase in defaults on loan will hamper the MFI sector in India.
 To the above it is highly disappointing that in this 2012-13 Union Budget no extra
provision for IMEF Announced by our finance minister
Conclusion:
"Microfinance is going to put poverty into the museum“
– Muhammad Yunus, Nobel Prize Winner & Founder of Grameen Bank
The whole point is that MFIs is not just an institution which is providing credit. It's an
institution, which is providing one microfinance services which basically should be that they are
supposed to do some training. They are supposed to handhold these things.
They are supposed to form a group, which has a joint liability. That's a sort of model
which is being used and today the major problem is of over borrowing of multiple lending and
so on and this becomes very difficult to control if you give a loan to an individual.
The whole concept of microfinance is that women are given money to set up some
income generating activity, so that they have a surplus which can supplement their household
income. It is not really money lending in another form.

19. Thus as we discussed above Micro finance has crossed many miles from its birth and
it is about to go many miles to achieve its goal of alleviating poverty not only in India but also all
over the world. It can achieve its goal only when the way it goes through is bed of roses that is
with proper legal framework let the announcement in Union Budget 2012-13 gives Micro
finance Institutions a way with bed of roses for miles to go.

20. Annexure I:
ABBREVIATIONS:
NABARD:National Bank for Agriculture and Rural Development .
SEWA:Self Employed Women Association.
MFI: Micro Finance Institutions.
NGO:Non Government Organisation.
NBFC:Non Banking Financial Companies.
CRISIL:Credit Rating and Information Services of India Ltd.
M-CRIL:Micro Credit Rating International Ltd.
ICRA:Internet Content Rating Association.
Annexure II
BIBILIOGRAPHY:
 RBI's Malegam Committee Report on Microfinance
 The Income Tax Act (1961), Section 11-4A and 12A
 Sa-Dhan Report on Existing Legal & Regulatory framework for Microfinance in India,
2006
 BBC Podcast on India's Microcredit Meltdown, Jan 2011
 Doug Johnson, The Geographic Distribution Of Microfinance Services In India 2007
 CRISIL Ratings India MFI Institutions 2010

21.  Microfinance In India State of the Sector Report 2009
 M-CRIL (2005). “A Study of the Regulatory Environment and its Implications for
Choice of Legal Form by Microfinance Institutions in India”. Published by Sa-dhan.
Websites:
 www.mixmarket.org
 www.en.wikipedia.org/wiki/Microfinance
 www.microfinancegateway.com
 www.microfinancefocus.com
 www.indiamicrofinance.com
 www.microfinanceindia.org
Magazines:
 Economic Times
 Hindu Business Line
 Business Standard