This document provides an overview of microfinance in India. It discusses the history and evolution of microfinance, including pioneering organizations like Grameen Bank. It describes the different elements of microfinance like microcredit, microsavings, and microinsurance. It analyzes the various types of organizations that provide microfinance in India, including formal sector banks, semi-formal MFIs, and informal moneylenders. It also examines the growth of the sector, challenges faced, the role of microfinance for women, and its impact in alleviating poverty.

1. REPORT BY:
HARSHIT JAIN
IBS BUSINESS SCHOOL
GURGAON.

2. Flow of Presentation
Elements of Microfinance
History of Microfinance
Microfinance Approach
Need for Microfinancing
Organizations and Composition of the Sector
Why do MFIs charge such high interest rates to
poor people?

3. Flow of Presentation
Impact of Microfinance over poverty
Current Scenario of Micro - financing in India
Challenges in the Indian context
Microfinance for Women in India
Conclusion
Bibliography

4. Elements of Microfinance
• Microfinance
• Microcredit
• Microsavings
• Microinsurance
• Remittances

5. Microfinance :
“It is a provision of a broad range of financial services
such as deposits, loans, payment services, money
transfers, and insurance to poor and low-income
households and their micro-enterprises.”
Microcredit :
Microcredit is the extension of very small loans
(microloans) to the unemployed, to poor entrepreneurs
and to others living in poverty who are not considered
bankable.

6. Micro insurance :
Financial arrangement to protect low-income people
against specific perils in exchange for regular premium
payments proportionate to the likelihood and cost of the
risk involved
Micro savings :
Deposit services that allow one to store small amounts of
money for future use. Often without minimum balance
requirements, savings accounts allow households to save
in order to meet unexpected expenses.
Remittances :
Transfers of funds from people in one place to people in
another, usually across borders to family and friends.

7. History of Microfinance
THE PIONEERS :
Grameen Bank
ACCION International
FINCA International

8. History of Microfinance in India
Microfinance has been in practice for ages (though
informally).
Legal framework for establishing the co-operative
movement set up in 1904.
Reserve Bank of India Act, 1934 provided for the
establishment of the Agricultural Credit Department.
Nationalization of banks in 1969
Regional Rural Banks created in 1975.
NABARD established as an apex agency for rural finance
in 1982.

9. Microfinance Approach
Poor are Bankable; successful initiatives in micro finance
demonstrate that the borrowers are not 'weaker sections'
in need of charity, but can be treated as responsible
people on business terms for mutual profit.
They have the inherent capacity to save small amounts
regularly and are willing to save provided that they are
motivated and facilitated to do so.

10. Microfinance Approach
Easy access to credit is more important than cheap
subsidized credit which involves lengthy bureaucratic
procedures.
Peer pressure' in groups helps in improving
recoveries.

11. Need for Micro financing
• Who are client’s of microfinance?
. In Rural area,
. In Urban area,
. Others.
• How it helps the poor people?
• When is microfinance NOT an appropriate tool

12. COMPARISON OF GROWTH RATE OF BORROWERS PER MFIs

13. Types of Organizations and
Composition of the Sector
Formal sector
The formal sector comprises of the banks such as
NABARD, SIDBI and other regional rural banks (RRBs).
provide credit for assistance in agriculture and micro-
enterprise development and primarily targets the poor.
Their deposits at around Rs. 350billion and of that,
around Rs. 250billion has been given as advances. They
charge an interest of 12-13.5% but if we include the
transaction costs they come out to be as high as 21-24%.

14. Types of Organizations and Composition
of the Sector
Semi - formal Sector
The majority of institutional microfinance providers in India
are semi-formal organizations broadly referred to as MFIs
and SHGs. Registered under a variety of legal acts; these
organizations greatly differ in philosophy, size, and
capacity.
Informal Sector
In addition to friends and family, moneylenders, landlords,
and traders constitute the informal sector. it is undeniable
that they play a significant role in financial lives of the poor.

15. (Microfinance Institution) MFIs
A microfinance institution (MFI) is an organization that
provides financial services targeted to the poor. While
every MFI is different, all share the common
characteristic of providing financial services to a client
poorer and more vulnerable than traditional bank clients.
Year Outreach Outstanding
2001 3 64
2002 10 215
2003 11 327
2004 37 433
2005 67 1095
Client outreach in lakhs, outstanding in crores.

16. Self Help Groups (SHGs)
SHGs is group of rural poor who have volunteered to organize
themselves into a group for eradication of poverty of the members.
They agree to save regularly and convert their savings into a
Common Fund known as the Group corpus.
A self-help group may consist of 10 to 20 persons.
All members should belongs to B P L families, but in some
exceptional cases they can be from families above the poverty line.
The group should be able to collect the minimum voluntary saving
amount from all the members regularly in group meetings.
The group should develop financial management norms covering the
loan sanction procedure, repayment schedule and interest rates.
50% of the groups formed in each block should be exclusively for the
women.

17. 2002 2003 2004 2005 2006
SHG financed during the year 197,653 255,885 361,731 539,365 620,109
Rate of growth of loans to new SHGs(%) 32 29 41 49 15
No. of SHG. Receiving repeat loans 41,413 102,391 171,669 258,092 344,502
Proportions of repeat loans in total loans(%) 17 29 40 32 36
Bank loans disbursed during the year (cr.) 545 1,023 1,855 2,994 4,499
of which, disbursed as new groups 453 691 1,158 1,727 2,330
of which, disbursed as repeat loans 92 332 698 1,268 2,169
Average loan size-new (Rs) 22,919 27,005 32,013 32,019 37,574
Repeat loans (Rs.) 22,215 32,425 40,660 49,130 62,960
Source: NABARD
Growing but not fast enough
In 2005, 5.39 lakh SHG received Rs. 2994 cr. in bank loans
Self Help Groups (SHGs)

18. Figure are outstanding loans in Rs. crore
0
1000
2000
3000
4000
5000
2001 2002 2003 2004 2005
Year
SGHs
MFIs
SHG and MFI are primary resource of lending the poor in rural area

19. Why do MFIs charge such high interest
rates to poor people?

20. Impact of Microfinance over poverty
Through the labour market
Through the capital market
Through the markets for goods consumed by poor
people
Through production linkages

21. Current Scenario of Micro - financing in India
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)
Cont……

22.  Only about 5 % of rural poor have access to
microfinance.
 Considerable gap between demand and supply for all
financial services
 Majority of poor are excluded from financial services.
This is due to the following reasons.
 Bankers feel that it is fraught with risks and
uncertainties.
 High transaction costs
 Unfavorable policies which effectively limits the viability
of serving the poor.
Contd….
Contd…..

23. 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 %).
household credit demand vary from a minimum of Rs.
2,000 to Rs. 6,000 in rural areas and Rs. 9,000 in urban.
Contd….

24. At a Glance: Scale of Indian Microfinance
Population of India (estimate - June 07) 1,129 million
Microfinance Services - potential client outreach 350 million
Microfinance Services - current client outreach (Mar. 06) 40 million
Annual growth in Microfinance Services 50%
Microfinance loan portfolio (Mar. 06) USD 2 billion
financing needs - 4 year estimate (Sept. 06) USD 7 billion
What is the government’s role in supporting
microfinance
Microfinance and Capital Requirement
Demand for micro-lending in India

25. Challenges in the Indian context
Appropriate legal structures for the structured
growth of MF operations
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.
Contd….

26. Contd……
Ability to innovate, adapt and grow.
Bring out a compendium of small and micro enterprises
for the MF clients.
Identify and prepare a panel of locally available trainers.
Ability to train trainers.
Capacity to provide backward linkages or create support
structures for marketing.
There is a break-even point in loan and deposit sizes
below which banks lose money on each transaction they
make. Poor people usually fall below it.
Designing financially sustainable models

27. Microfinance for Women in India
Women's Role in Economy
Women and micro finance
Women’s participation in Microfinancing activities

28. Rural Finance for Rural women
Rural women at a glance
 Loan facilities
 Saving facilities
Sources of finance available
 Official system
 Unofficial system
 Agriculture organization
Training of and information for rural women

29. Micro Facts
The World Bank estimates at there are now over 7000
microfinance institutions, serving some 16 million poor
people in developing countries. The total cash turnover of
MFIs world-wide is estimated at US$2.5 billion and the
potential for new growth is outstanding.
The Grameen Bank in Bangladesh aims to provide credit
to those in extreme poverty. Some 94 per cent of those
who meet the bank's criteria and take up loans are women.
Grameen borrowers keep up repayments at a rate of
around 98 per cent. The Bank lends US$30 million a
month to 1.8 million needy borrowers.

30. Micro Facts
In Africa, women account for more than 60 per cent of the
rural labor force and contribute up to 80 per cent of food
production, yet receive less than 10 per cent of credit
provided to farmers.
The Microcredit Summit estimates that US$21.6 billion is
needed to provide microfinance to 100 million of the
world's poorest families. The Summit planners say it
should be possible to raise US$2 billion from borrowers'
savings alone.
 It is estimated that worldwide, there are 13 million
microcredit borrowers, with USD 7 billion in outstanding
loans, and generating repayment rates of 97 percent. It has
been growing at a rate of 30 percent annual growth.

31. Micro Facts
Fewer than 2 per cent of poor people have access to
financial services (credit or savings) from sources other
than money lenders.
Under 10 million of the 500 million people who run micro
and small enterprises have access to financial support for
their businesses.
There is a potential demand for Microcredit services from
seven million borrowers.
There is a potential demand for Micro savings services
from 19 million savers.

32. Conclusion
The poor repay their loans and are willing to pay for
higher interest rates than commercial banks provided that
access to credit is provided.
The solidarity group pressure and sequential lending
provide strong repayment motivation and produce
extremely low default rates.
banking on the poor can be a profitable business.
However, attaining financial viability and sustainability is
the major institutional challenge.

33. Conclusion
Microfinance can contribute to solving the problem of
inadequate housing and urban services as an integral part
of poverty alleviation programs.
It would be ideal to enhance the creditworthiness of the
poor and to make them more “bankable”.
Microfinance institutions have a lot to contribute to this
by building financial discipline and educating borrowers
about repayment requirements.

34. Bibliography
JOURNALS AND MAGAZINES
Centre for microfinance, Jaipur
Article by N.Kavitha (SSM College of Engineering, Komarapalyam)
Working Paper No. 3 of Development Finance Impact Assessment
planning workshop
Ajai Nair- Sustainability of Microfinance Self Help Groups in India: (2005)
Chakrabarti, Rajesh: The Indian Microfinance Experience
Accomplishments and Challenges (2004)
WEBSITES
www.microfinancegateway.org
www.coolavenues.com
www.microfinance.org
www.indianmba.com
www.thehindubusinessline.com
www.ACCION.com