The document provides an overview of the microfinance sector in India. It defines microfinance and discusses the key features and models used, including self-help groups (SHGs) and SHG-bank linkage models. It outlines the case for microfinance in India given high poverty levels. It also discusses the various actors involved like MFIs, banks, NABARD, SIDBI and regulations like the Microfinance Institutions Bill. It notes that while microfinance has grown, there is still a large unmet demand and challenges remain around access to funding, human resources and over-indebtedness.

1. Microfinance sector in India
Prepared by
Amit 11810011
David Roy 11810025
Mayank Saxena 11810045
Sayantan Chattopadhyay 11810075

2. Definition
Microfinance refers to the small-scale financial services
including both credits and deposits provided to people who
farm or fish or herd; operate small or microenterprises where
goods are produced, recycled, repaired or traded; provide
services; work for wages or commissions; gain income from
renting out small amount of land, vehicles, draft animals, or
machinery and tools; in both rural and urban areas.
Key Features of Microfinance
Key Features of Microfinance
Prefer Small Cost Group Prefer
Do not
Lend to saving short covering appraisal women
take
the poor over term interest and customers
security
Borrowing loans rates guarantee over men
Microfinance means the provision of banking services to lower income people especially
to the poor and very poor.

3. Case for Microfinance in India
• Incidence of poverty: The World bank report on global poverty
reveals that India has 421 million people below $1.25 a day mark in
1981, the number had gone upto 456 million by 2005.While there
has been a decline in poverty ratio, the ranks of the poor are still
swelling.
• The Global hunger index prepared by International Food Policy
Research Institute(IFPRI) puts the number of hungry in India at 200
million-the largest population of hungry in the world.
• Hence the incidence of poverty and hunger in India is alarming and
to alleviate this situation, microfinance institutions can play a right
role by identifying the poor and lending small amounts of money so
that the poor invests in income generating activities, earn income,
create assets and overcome poverty.

4. State wise distribution of Microfinance

5. Developments in Microfinance in India
Microfinance in India has started to evolve in the early 1980’s with an effort
of forming informal Small Help Group (SHG) to provide access of financial
services to needy.
India is 2nd most populous country behind China with a large number of
un-financed poor people- Main clients for MFIs.
MFIs are estimated to have 7.94 million borrowers as of March 2008 with
CAGR of 88.42% over the last five years and cumulative outstanding loan
portfolio of US$824 million.
SHG has loan outstanding of US$356.45 million as of March 2008.Ity
shows a CAGR growth of 78.21%from FY03-FY08.
National Bank for Agricultural and The strength of the microfinance
Rural development(NABARD) and sector lies in the diversity of models, it
Small Industries Development Bank of has adopted including home grown
India (SIDBI) are devoting their models like MFI and SHG to other
financial resources and time towards learnt models from various countries
the development of microfinance. like Thailand and Bulgaria.

6. Pillars of Microfinance in India
Niche-Market MFIs in • Such as Spandana, SHARE Microfin Ltd., and SKS Microfinance have also
India scaled up their micro credit outreach dramatically in recent years
Private Banks like ICICI • Expanding its financial services to poor households through a multi-
prolonged approach-Directly providing credit facilities to SHG, and
Bank providing wholesale credit facilities to microfinance NGOs and NBFCs.
State owned/Commercial • The Syndicate Bank, Andhra Bank, Canara Bank and Indian Bank have
Banks entered this market.
• Started to eye low profile MFIs, as they foresee huge potentiality in terms
Private Equity Firms of returns from this sector. E.g. JM financial have investments from old
Lane Partners and Delhi based Lok Capital.
• NABARD & SIDBI are performing regulatory and promotional role,
NABARD & SIDBI providing financial resources as credit & equity and enhancing technology
know-how of MFIs.

7. Role of RBI,NABARD and SIDBI
• Support financial liberalization & create condition sustainable for sector
• Support projects of microfinance
RBI – Central Bank • Prudential regulation and supervision.
• Collecting data and advocacy
• Framing policy and guidelines for rural financial Institutions
• Providing credit facilities to issuing organizations
NABARD - Regulator • Preparation of potential-linked credit plans for all districts
• Overseeing the linking programme of banks to SHGs and offers refinance
for it.
SIDBI • Lends to MFIs through SIDBI foundation for microcredit.

8. Financing Model adapted by Banks
Bank Bank
Credit Client Credit Client
MFIs/NGO NGO Facilitator
Client Promotion & Training Promotion & Training
SHG SHG
Member/Client Member/Client
Direct Financing Model SHG-Bank Linkage Model

9. Micro Finance Approaches
SHG-Bank Linkage (Dominant Model)
• A homogeneous group of about 15 to 20
• Every member to save a small amount regularly. Pooled savings kept in a savings
bank account in SHG’s name
• SHG to use pooled thrift to give interest bearing loans to members – decisions
taken in group meetings
• Depending on the SHG’s maturity, bank gives loan to the SHG as a multiple of the
pooled savings. Bank loan added to the SHG kitty.
Design Feature
Self selection, Saving first and credit later, focus on women, market rate of
interest, progressive lending, credit rationing, Intra group appraisal system and
prioritization etc.

10. SHG-Bank Linkage Models
MODEL-I
SHGs formed and financed by Banks – 20%
MODEL-II
NGOs act as Facilitators – SHGs financed directly – 74%
MODEL-III
SHGs financed by Banks using NGOs as Financial Intermediaries – 6%
Source: NABARD, Status of
Microfinance in India

11. Micro Finance Institutions
Micro Finance Institutions (MFIs) are playing an important role of financial
intermediaries in micro finance sector. The MFIs operate under various legal
forms:
NGO MFIs – Registered under Societies Registration Act, 1860 and / or
Indian Trust Act, 1880
Cooperative MFIs – Registered under State Cooperative Societies Act or
Mutually Aided Cooperative Societies Act (MACS) or Multi- State Coop. Societies
Act, 2002
Not for profit companies - NBFC MFIs incorporated under Section 25 of
Companies Act, 1956
NBFC MFIs incorporated under Companies Act, 1956 & registered with RBI

12. MFIs(Continued)...
3 major initiatives by NABARD to support MFIs:
• Capital Support: Micro Finance Development Fund(mFDF) was setup with NABARD
by GoI in 2000-01 with the initial corpus of Rs. 100 cr. Increased to Rs. 400 cr in
2010-11.
• Revolving fund assistance to MFIs: on selective basis to MFIs for on-lending to
SHG or individuals.
• Rating of MFIs: Financial assistance by grants to CBs, RRBs, and cooperative bank
to avail service of rating agencies - CRISIL, M-CRIL, ICRA, CARE

13. Micro Finance Institutions(Development &
Regulation) Bill, 2011
A Bill to provide access to financial services for the rural and urban poor and
certain disadvantaged sections of the people by promoting the growth and
development of micro finance institutions as extended arms of the banks and
financial institutions and for the regulation of micro finance institutions and for
matters connected therewith and incidental thereto.
Micro finance sector lacks a formal statutory framework for its financial activities
• Constitution of Micro Finance Development Council - on formulation of policies,
schemes and other measures required in the interest of orderly growth and
development of the micro finance sector and micro finance institutions, to
promote financial inclusion
• State advisory councils: for Micro Finance at the State level and considering the
extent of micro finance activities in the States

14. Micro Finance Institutions(Development &
Regulation) Bill, 2011
• Registration of Microfinance Institutions: MFIs shall not commence or
carry on the activity of providing micro finance services without obtaining
a certificate of registration from the Reserve Bank under this Act.
• Reserve, Accounts, Audit & Returns: Create a reserve fund & transfer
there in a sum, representing such percentage, as may be specified by the
RBI, of its net profit or surplus realized by providing MF services every
year.
• Function and powers of Reserve Bank: promote and ensure orderly
growth for purpose of financial inclusion.
• Redressal Mechanism: appoint Micro Finance Ombudsmen for purpose of
redressal of grievances between client and MFIs.
Source: Finance Ministry, June 2011

15. Malegam Committee recommendations
• All bank loans to MFIs, including non-banking financial companies (NBFCs) working
as MFIs would be treated as priority sector lending(conditions to qualifying asset
criterion).
• Loan must be to rural household with annual income of not more than INR 60,000.
For urban or semi-urban borrower, household income must be INR 120,000 or less.
• Loan amount cannot exceed INR 35,000 in first cycle and INR 50,000 in subsequent
cycles.
• A household’s total indebtedness at any given time should not exceed INR 50,000
• Loan term should not be less than 24 months for amounts more than INR 15,000
without prepayment penalty.
• Loans to be extended without collateral

16. Malegam Committee recommendations…
• Aggregate amount of loan for income generating purposes must be at least
75% of total advances.
• Loans must be repayable by weekly, fortnightly or monthly insallments, the
choice of which will vest with the borrower.
• To qualify as priority sector loans, banks must ensure a margin cap of 12% and
an interest rate cap of 26%
• MFI loans can be extended to individuals outside of self-help groups (SHG) or
joint liability group (JLG)
• Bank loans to other NBFCs will not be treated as priority sector leading
effective April 1, 2011.

17. The Profile of Microfinance in India
The scenario
• Estimated that 350 million people live Below Poverty Line
• This translates to approximately 75 million households.
• Annual credit demand by the poor in the country is estimated
to be about Rs. 60,000 crores.
• Cumulative disbursements under all microfinance programs is
only about Rs. 5000 crores.(Mar. 04)
• Total outstanding of all microfinance initiatives in India
estimated to be Rs. 1600 crores. (March 04)
• Only about 5 % of rural poor have access to microfinance.

18. The Profile of Microfinance (contd)
• Though a cumulative of about 20 million families have accessed
microfinance to the extent of Rs. 5000 crores, the total
outstanding is estimated to be only about Rs. 1600 crores. The
active borrowers are estimated to have a per capita outstanding
of only Rs. 2500.
• While 10 % lending to weaker sections is required for commercial
banks, they neither have the network for lending and supervision
on a large scale nor the confidence to offer term loans to big
MFIs.
• The non poor comprise of 29 % of the outreach.

19. The Status of Microfinance in India
• Considerable gap between demand and supply for all financial
services
• Majority of poor are excluded from financial services. This is due
to, inter-alia, the following reasons
1. Bankers feel that it is fraught with risks and uncertainties.
2. High transaction costs
3. Unfavorable policies like caps on interest rates which effectively limits the viability of
serving the poor.
• While MFIs have shown that serving the poor is not an unviable
proposition there are issues that have constrained MFIs while
scaling up. These include
1. Lack of an appropriate legal vehicle
2. Limited access to equity
3. Difficulty in accessing low cost on-lending funds (as of now they are unable to offer
savings services in a legitimate manner.

20. The Status of Microfinance (contd)
• Limited access to Capacity Building support which is an
important variable in terms of quality of the portfolio,
MIS, and the sustainability of operations.
• About 56 % of the poor still borrow from informal sources.
• 70 % of the rural poor do not have a deposit account
• 87 % have no access to credit from formal sources.
• Less than 15 % of the households have any kind of
insurance.
• Negligible numbers have access to health insurance (0.4
%) and crop insurance (0.2 %).

21. Features of Indian MF
• About 60 % of the MFIs are registered as societies.
• About 20 % are Trusts
• About 65 % of the MFIs follow the operating model of SHGs.
• Large concentration in South India
• 600 MFI initiatives have a cumulative outreach of 1.25 crore poor
hoseholds
• NABARD’s bank linkage program has cumulatively reached a total
of 9.4 lakh SHGs with about 1.4 crore households.

22. Challenges faced by MFIs
• Finding adequate levels of equity for the new entities to
leverage loan funds
• Ability to access loan funds at reasonably low rates of interest.
• Ability to attract and retain professional and committed human
resources.
• Design of apt MIS including user friendly software for tracking
accounts and operations.
• Appropriate loan products for different segments.

23. Challenges faced by MFIs
• The loans given to poor customers are invested in such things
as tools, inventory and livestock where returns are low.
• The poor lack skills, education and the ability to create
productive assets for steady income flows.
• Over-indebted clients
• In 2010, in the wake of a spate of suicides by
borrowers, allegedly due to the coercive recovery practices
employed by MFI agents, came the AP MFI Act which
mandates prior approval of every loan application by the state
government authorities.

24. Growth Projection
• The four largest
MFIs operating in
AP recorded
negligible growth
rates in 2010-2011
• At end-March 2011
there was 20%
increase in client
accounts served
compared to
previous year
Source: Micro-Credit Ratings International Limited

25. “If we want to help poor people
out, one way to do that is to help
them explore and use their own
capability. Human being is full of
capacity full of capability, is a
wonderful creation. But many
people never get a chance to
explore that, never, no that she
nor he has that”
― Muhammad Yunus