The document provides a comprehensive overview of microfinance, detailing its definition, development, and structure in India and Southeast Asia. It highlights the roles of major institutions like the RBI and NABARD, the financial services offered to low-income groups, and the challenges the industry faces, such as high transaction costs and credit risks. Key growth drivers and future outlook for microfinance are also discussed, emphasizing the sector's potential to provide financial access to the poor.

1. Microfinance
An Introduction
Kabare Piyush Madhukar
M.B.B.S (Mumbai), PGPM (Indian Institute of Management, Indore)
Assistant Manager, Vidarbha Cluster In-Charge
Microfinance, RFD-RFU
L&T Finance Limited

2. Index (1/2)
Introduction
• What is Microfinance
• Definition
Industry Preview
• Global Developments in Microfinance
• Major Changes in Microfinance Scenario in South East Asia
• Developments in Microfinance in India
• Pillars of Microfinance in India
Microfinance Industry Structure
• Role of RBI (Central Bank) and NABARD (Regulator)
• Major Players in the Industry
• Financing Model adapted by Banks in Microfinance Industry
• Microfinance Delivery Model
Microfinance Lending Process
• Client Characteristic Microfinance Services
• Lending Process in Microfinance
Business Strategy
• Business Strategies of Microfinance Institutions
• Business Strategies of Private Banks/Commercial Banks
• Growth Drivers for Sector

3. Index (2/2)
Key Challenges
• High Transaction and Service Cost
• Credit Risk
• Other Risks
Recommendations
• Regulations and Policies
• Operational Improvement
Future Outlook
• Future Growth Outlook
• Entry of New Players
• Sustainability of Microfinance
• Role of Private Sector Investment
Special Issues
• Reasons for Failure to fulfill the desired objective
• Urban Microfinance
• Rating of Microfinance Institutions
Annexure
• Abbreviations
• References

4. What is Microfinance
Definition
INTRODUCTION

5. Introduction: What is Microfinance?
The scenario of supply of formal financial Access to financial services are
services within India constraint for the poor and not interest
rates.
The poor can save and can indeed use a
An estimated demand for credit ranging from wide range of financial services.
$3 to $9 billion annually
The formal sector is barely able to provide $200
to $300 million,
Poor people use not only credit but also
saving service, insurance and affordable
remittance systems to manage assets,
generate income and improve their
A total of over 600,000 villages lives.
Barely 30,000 bank branches
For most of us, microfinance means
providing very poor families with very
Various Insurance, Investment and Saving small loans (micro-credit) to help them
Products for Poor section engage in productive activities
Basic financial services remain out of reach.
Microfinance is an collective term used for financial intermediation services to low income group
and poor customers. Services offered are Credit facility, Saving accounts, Money transfers,
Remittances, Insurance and even Investment.

6. Definition
Microfinance refers to 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 amounts of land, vehicles,
draft animals, or machinery and tools; in both rural and
urban areas.
Key Features of Microfinance
Cost Group Prefer
Do not Prefer Small
Lend to the covering appraisal women
take saving over short-term
poor interest and customers
Security borrowing loans
rates guarantee over men
Microfinance means the provision of banking services to lower-income people, especially the
poor and the very poor.

7. Developments in Microfinance – Global
Developments in Microfinance – South East Asia
Developments in Microfinance – India
Pillars of Microfinance in India
INDUSTRY PREVIEW

8. Developments in Microfinance – Global
The Grameen Bank has
Since 1976, the Grameen been duplicated in Bolivia,
Bank has grown to include Chile, China, Ethiopia,
Microfinance has spread
more than 5.5 million Honduras, India, Malaysia,
to cover five continents
members with more than Mali, Philippines, Sri
and numerous countries.
US$5.2 billion in disbursed Lanka, Tanzania, Thailand,
loans. United States, and
Vietnam.
MFIs have become more
As MFIs became better Microfinance Institutions
efficient; increased their
versed in the (MFIs) have also begun to
client base and expanding
microfinance markets, seek out public and
their services through
they applied their international financing,
different product such as
innovations in all increasing their working
micro-savings, flexible
processes from lending to capital and expanding the
loan repayment, and
the collection of deposits. scope of their operations.
insurance.
On an overall perspective Microfinance has immense potentiality with three billion people i.e.
half the world’s population living less than US$2 per day, unable to meet their basic human needs

9. Developments in Microfinance – South East Asia
Grameen Bank discarded JLG model of Micro-credit
• The new approach that is Grameen II in which all savings are on an individual basis and
there is no group liability, offers flexible loan arrangements for terms of 3 months to 3
years and variable repayment schedules to avoid seasonal difficulties.
The expansion of scope of services beyond credit.
• Services offered are Credit facility, Saving accounts, Money transfers, Remittances,
Insurance and even Investment.
The emergence of profit-making Microfinance Institution (MFIs).
• Currently, profitable MFI’s are present in most countries reporting huge returns on
assets (ROAs) and returns on equity (ROEs) in comparison to conventional banking
institutions.
• The MFIs in South Asia have reached profitability through cost efficiency while those in
East Asia seem to have relied more on relatively high interest rates.
Emergence of Commercial Microfinance
• Small core group of highly commercial and professional, market-oriented institutions
have emerged but not yet become fully integrated into the broader mainstream
commercial financial systems.
South Asia has also distinguished itself by forging successful partnerships for microfinance
between governments, NGOs, civil society, private sector, and communities.

10. Developments in Microfinance – India
Micro finance in India has started to evolve in 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.
It shows a CAGR growth of 78.21% from FY03- FY08.
MFIs are increasing their share in Indian microfinance supply as of
comparison to SHGs where their share has gone down to 53% in
March 2008, from 72% in the year March 2003.
National Bank for Agriculture and Rural The strength of microfinance sector lies in the
Development (NABARD) and Small Industries diversity of models, it has adopted including
Development Bank of India (SIDBI) are devoting home grown models like MFI and SHG to other
their financial resources and time towards the learnt models from various countries like
development of microfinance. Bangladesh, Thailand and Bulgaria.

11. Pillars of Microfinance in India
Niche-Market • Such as Spandana, SHARE Microfin Ltd, and SKS Microfinance have also
MFIs in India scaled up their micro-credit outreach dramatically in recent years.
• Expanding its financial services to poor households through a multi-
Private Bank like
ICICI Bank
pronged approach—Directly providing credit facilities to SHG, and
Providing wholesale credit facilities to microfinance NGOs and NBFCs.
State Owned/
• The Syndicate Bank, Andhra Bank, Canara Bank, and Indian Bank, have
Commercial
Banks entered this market.
• Through its Microfinance Development Strategy, aims to ensure
ADB permanent access to institutional financial services for the region's
poor people and their small businesses.
• Started to eye the low-profile MFIs, as they foresee huge potentiality in
Private Equity
Firms
terms of returns from this sector. e.g. JM Financial have investments
from Old Lane Partners and Delhi based Lok Capital
• NABARD and SIDBI are performing regulatory and promotional role,
NABARD & SIDBI providing financial resources as credit & equity and enhancing
technology know-how of MFIs

12. Role of RBI (Central Bank) and NABARD (Regulator)
Major Players in the Industry
Financing Model adapted by Banks in Microfinance Industry
Microfinance Delivery Model
MICROFINANCE INDUSTRY
STRUCTURE

13. Role of RBI (Central Bank) and NABARD (Regulator)
• Support financial liberalization & create conditions sustainable for Sector
Role of RBI • Prudential regulation and supervision
(Central • Supporting the pilot projects of microfinance
Banks) • Collecting data and publication
• Training and advocacy
• Framing policy and guidelines for rural financial institutions
Role of The • Providing credit facilities to issuing organizations
NABARD • Preparation of potential-linked credit plans annually for all districts for
(Regulator) identification of credit potential
• Monitoring the flow of ground level rural credit
Division of Responsibility in Microfinance
NABARD SIDBI
Oversees the linking programme of banks to Lends to MFIs through SIDBI Foundation for
SHGs and offers refinance for it micro-credit.

14. Major Players in the Rural Finance Market
Public Sector
Banks
Regional
Private Banks
Rural Banks
Private
Funding Rural Schedule
Commercial
Institution Banks
Market
Players
Cooperative
NGO
Banks
MFIs SHG

15. Microfinance Delivery Model
Self Help Groups MFI/Grameen Legal Forms of MFIs
• Home grown, co- Replica
• NGO MFIs (Societies
operative • Group Lending and Registration Act, 1860 or
• Savings based / led Regimented Provincial Acts and/or
• Meeting diverse needs • Focused on self- Indian Trust Act, 1882)
• Promoted by NABARD, sufficiency • Non-profit Companies
PSU Banks, NGOs • NGO-MFI and NBFC- (Section 25 of the
• Performance –mixed MFI Companies Act, 1956)
• Pace of growth - cause • Financial Corporations -
for concern Specialized entities
focusing on specific
segments like SC/ST,
Minorities
Grameen II Wholesome • Mutually Aided Credit
Society (MACS) -
• Individual lending Microfinance community owned & -
• NBFC-MFI Services popular in Andhra Pradesh
• Cooperative MFIs
• Progressive Loan • Regulation
(Cooperative Societies Acts
focused on • Specialized activities of the State & Central
enterprise • Cost is major factor Governments)
• Future of • Distant dream • Non-Banking Financial
Microfinance Companies (NBFCs) (Indian
Companies Act, 1956, RBI
Act, 1934)

16. Financing Model adapted by Banks in Microfinance Industry
Bank
Client
Credit NGO (Facilitator)
Promotion
& Training
SHG
Client Member
Direct Financing Model SHG-Bank Linkage Model
• Most MFIs use groups as intermediaries • NGO to act as facilitator/financial
for financial transactions, but there are intermediaries between bank and SHG to
different ways of working with groups. initiate micro savings through an account
• The NGO promotes, imparts training, • The intermediation cost could be around
forms groups and also gives credit to 6% of the loan amount.
them. • Risk lies with the banks as advances to
• Under this model either SHGs are formed the SHGs are reflected in bank portfolios.
by banks or by NGOs and formal agencies • Banks bear risk as it involve a lot of
but are financed by banks. transaction costs.

17. Client Characteristic Microfinance Services
Lending Process in Micro-Finance
MICROFINANCE LENDING PROCESS

18. Client Characteristic Microfinance Services
Activity RoE RoIC Net Annual
Classification of Activities - Return in US$
Micro-credit Loan
Trade Vegetable Vending 50 57 143
Trade Production Live Stock General Store 14 29 144
Service Agriculture Other Sweet Making Shop 145 147 1010
Ice Cream Making 13 29 305
3%
6% Agriculture Leasing mango trees 184 185 511
33% Leasing irrigated farm land 160 161 667
25%
Services Operating a Flour Mill 52 59 409
Tailoring 121 123 307
10%
23% Roadside Micro-diner 245 246 1528
Livestock Goat rearing 58 65 40
Buffalo rearing 69 74 246
Production Pottery 235 236 520
Microfinance clients are poor with Activities in rural areas are farming, food processing, petty trade,
relatively stable source of income. livestock, vending, and production like basket weaving.
Clients of microfinance are excluded by Activities in urban areas are shops, services, artisans, street
formal financial institutions. vendors & new age businesses (beauty parlor to photography).
Women make up the vast majority of Majority of the population borrow for trading, working capital
borrowers, especially in Asia (99%). requirements for existing business or for setting up new one.

19. Lending Process in Micro-Finance
Geo-Economic • Based on the geo-economic information about his region (typically a district or
Survey of Region mandal) and various towns and villages, MFI approach favorable villages.
• Then MFI visits the village &tries to gather first hand information about the population
Village Appraisal of that village, their religion, cast, type of trades, skills, financial states, their needs.
• Conducts a survey to evaluate potentiality for the operations in the village, some key
Selection of Village parameters are total population, poverty level, accessibility, political stability & safety.
• After selection of village, interested women form self selected four to six member
Group Formation groups to serve as guarantors for each other. This process is called Group Formation.
• When formed group meets the minimum requirements, it begins Compulsory Group
Training of
Training program designed to educate clients on the processes and procedures of
Borrowers
microfinance loans and build a culture of credit discipline.
Scrutiny and • Customer details, their business and their earning capacity are scrutinized and judged
Underwriting to access repaying capacity.
Financial • Collection meetings are held on a weekly/monthly basis by Field Assistants to conduct
Transactions all financial transactions. In addition, clients use the weekly meetings to discuss new
loan applications, loan utilization and community issues.
Near Mandatory • Insurance products are sold to cover death, accident or health of group member,
Insurance member’s spouse and/or children.

20. Business Strategies of Microfinance Institutions
Business Strategies of Private Banks/Commercial Banks
Growth Drivers for Sector
BUSINESS STRATEGY

21. Business Strategy of Microfinance Institutions
Social Services and
Initiatives: Include
Technology: To Investment in nutrition, Leveraging Finance: The
overcome its transaction health, education, and NGO leverages livelihood
costs, increase the speed vocational training, investments by linking
of transaction, reduce Agricultural and Business the rural poor to
redundancies and development services. government programs
better control
and banks.
mechanism.
Human Resource
Learning Best Practices
Capacity Building:
from the Business
workshops, special
World: Like standardized
programs, trainings and
distribution process
exposure visits of the
used by McDonald
staff and clients.
Geographical Expansion
Business Complete Bouquet of
and Vertical Expansion:
Increasing the individual
Strategy Financial Services: like
Savings, Credit ,
loan portfolio by of MFIs Insurance for the lives
providing Micro and livelihoods of the
Enterprise Loan, bigger poor, Infrastructure
than JLG loans. finance

22. Business Strategies of Private Banks/Commercial Banks
• MFIs identify, train & promote microfinance clients. Bank finances
Partnership Model clients directly on the recommendation of the MFI. Customer and
portfolio resides in the bank’s book.
• Bank buys out portfolios from MFIs. MFI continues to service the
Securitisation of
clients and acts as the collection agent. MFI shares the credit risk
Portfolios of MFIs
with the bank.
• Adopting a 'Core Banking System' for managing the loan portfolio
Technology
generated under the partnership model.
Credit to • A wholesale linkage model which implies extending a bulk loan to
MFIs/NGOs the MFIs for lending to poor women
Systems and Loan • Active involvement in providing mentoring services to clients,
Portfolio Evaluation including in the areas of governance and credit discipline.
Liaisons with the • Operating divisions at regional and branch level are in close
NGOs connection with NGOs in local area to take the movement ahead.
High transaction cost, poor reach and unavailability quality manpower, has obliged Banks to
adapt various approaches through Microfinance to fulfill priority sector lending norms

23. Growth Drivers for Sector
• Lack of lending from Banks due to lack of collateral and exploitation from
Need for Credit by money lenders has exemplified the potential demand for microfinance
Unprivileged Class services and the growth prospects of the industry.
• These include commercial debt and equity, form of grants and donations
Increase in the and PE including VC funding. This has changed capital structure of this
sources of finance industry for better
• Innovation in diversifying lender base, consolidating internal control systems
Innovation and strengthen policies on human resources, disclosure, and organisational
processes.
Government Policy • Microfinance Bill & proposed regulator NABARD will regulate & promote
and Support growth of this sector in line with importance attached by government to this
sector.
Consolidation in the • Increase in the number of partners in the commercial space will enable
Industry them to introduce new products in insurance, remittance etc.
Growing Migration • Higher average loan size and greater use of technology such as smart cards
and Urbanization and point-of-sale devices with wireless connectivity. in the urban areas will
increase urban micro-financing.
Human Resource • Microfinance is attracting high quality, talented managers. People with skills
Capacities in specialized HR needs such as local recruitments and cultural and linguistic
integration; Standardizing the operating process and systems

24. High Transaction and Service Cost
Credit Risk
Other Risks
KEY CHALLENGES

25. High Transaction and Service Cost
Reasons
• Average microfinance loan size is small,
hence the transaction cost on a percentage
basis for a microfinance loan is higher.
• Lending large size loan may require
evaluating the client, again increasing cost
The most popular form of lending in • Very high operational costs, especially at
India is JLG model which incurs loan origination & during monitoring is
peculiar costs such as group formation because of doorstep service and little or no
costs, cost of training the borrowers deployment of technology solutions.
with respect to the procedures to be • Intense monitoring and repeated
followed, higher degree of interaction.
supervision, as well as higher • Increased competition will lead to better
frequency of installment payments. quality in services, lower loan sizes, lower
MFIs face the challenge of finding rate of interests, diversification of products
and use of technology as well to reduce the
ways to reduce lending costs.
transaction cost and cost of lending.
Technology innovation, improved rural infrastructure, borrower education and urban
microfinance are few ways to mitigate high transaction cost

26. Credit Risk
Irregular Flow of • Seasonality of agricultural activities & unique requirements of
Income due to financing such activities (payback of loans can only take place
Seasonality after production)
• Traditional farming practices, heavy dependence on monsoon,
High Dependence on
heavy dependence on the seasonal income, making it difficult to
Monsoon
assess borrower’s repayment capacity.
Uncertainty of • Risk arises because of the nature of uncertainty involved with
Market Conditions agricultural output — in terms of yield and price.
Lack of Skills leading • Due to lack of proper education and vocational skills, their
to Un-employability employability in non-farming jobs is very low.
Lack of Tangible • Absence of land deed, no records like IT returns irregular flow of
Proof for Assessment income due to seasonality constitutes lack of tangible income
of Income proof.
Need for Information • Adverse selection, over-indebtedness of clients and moral hazard
Sharing & Better due to Lack of information about credit-worthiness of potential
Technology clients.

27. Other Risks
Operational Risk
• Inadequate or failed internal process due to people, system or external events.
• Rural people do not have credit history background.
Business Promotion
• MFIs need skills in business management, such as marketing , finance and HR.
• Delivery of these skills is pending issue for most of them
Literacy & Skill Levels of Clientele
• Low levels of literacy, relatively undiversified economies, high dependence on
agriculture
• Rural economic activities have low profitability and prone to high risk
Diversion of Funds to Unproductive Activities
• Use of loans for unproductive activities instead of purpose stated to the lender
• It is very difficult to assess where he/she is going to utilize the money.
Regulatory Issues
• Still unregulated and not supervised by any dedicated body.
• MFIs are growing fast & they require regulatory authority to facilitate the growth.

28. Regulations and Policies
Operational Improvement
RECOMMENDATIONS

29. Regulations and Policies
• Definition of MFI: Encompass and allow MFIs to serve poor not only as lender but as full
financial service provider without increasing risk for poor customer and MFI itself.
• Recognition of MFI as specialized activity on par with leasing or housing finance and
creation of a specialized category of NBFC [Amendment to the RBI Act]
• Easing of entry norms for “loans only companies”. As these companies will not accept
savings or offer financial services, they carry less risk of default (Need a RBI notification)
• Mechanism to graduate to Microcredit + Service by allow for limited and laddered
provisions for strong companies to morph into bank. (Major policy & legal change)
• Ensure that commercial activities like microfinance are carried out in commercial forms
of organizations when they reach scale. Trusts/Societies are not designed to do so.
• MFI can be best regulated on “Usurious” interest and ethical practices by unleashing co-
operative and the banking sector to provide effective competition.
• State should not interfere in the commerce of the sector by offering Loan waivers or
bad policy interventions like Interest rate caps (even informal caps).

30. Operational Improvement
Focus on Urban Microfinance Rural Infrastructure
• High customer density leads to decrease • Offer financial services with a superior
transaction cost. design and convenience to the client.
• Increased reach with cost spread and rapid • Connectivity at the village level enabling
growth ATMs and other payment devices.
Unique identifier Credit Bureau
• Basis for initiatives like credit history • Credit information tracking and sharing
tracking and targeting for services such as enables lenders to provide incentives to
health insurance those with good credit history and
• Best done by the Government or agencies provides a strong deterrent to willful
such as NUIA. default.
Information Sharing Technological innovations
• Independent service provider will take care • As smart cards, biometric IDs, and rural
of MFI apprehensions on borrower info- kiosks
sharing • Help in reducing the transaction costs and
• It requires skilled personnel; technological rapid growth.
advancements.

31. Future Growth Outlook
Entry of New Players
Sustainability of Microfinance
Role of Private Sector Investment
FUTURE OUTLOOK

32. Future Growth Outlook
Size and Growth:
• Currently Global microfinance sector has estimated loan portfolio of US$25
billions.
• It is able to serve only fraction (~100 million) of the potential 1 billion micro
borrowers in 2007.
• Within next 4 years Loan size in Indian market is expected to grow to a size of
about Rs250 billion from the current market size of Rs27 billion at a compounded
annual growth rate of 76% and to 400-million client base as against current 15
million.
• Greater degree of capital market involvement
• Favorable attitude from Government of India and RBI
Scalability of Microfinance in Future
• Inflexible loan products and unavailability of savings and insurance services due to
regulatory barriers are big hindrance for growth.
• Insufficient data exists on client-level impact, though new tools such as the
Poverty Progress Index of Grameen Foundation and the work of Sa-Dhan (Indian
MFIs Association) on measuring client satisfaction are addressing this gap.
• The market, and not the state, should decide interest rates.
• Ensure transparency and full disclosure of rates including fees
• New Technologies

33. Entry of New Players
New Player
• New players may opt for group or individual lending, village banking or any other
form of lending that they find suitable.
• Their participation will depend on their capacity and commitment, leadership,
enabling environment, and access to financial capital.
Non-Governmental Organizations
• More NGOs are expected to incorporate microfinance as one of their programs.
• International NGOs and agencies will develop microfinance programs in areas
where microfinancing is not a familiar concept in reducing poverty.
• Community-based organizations may get involved in microfinance services.
Government Channels
• Government channels at the grassroots level may be used to serve the poor with
microfinance where there are no microfinance institutions, the
• Postal savings banks may participate more vigorously not only in mobilizing
deposits but also in providing loans to the poor and on-lending funds to the MFIs.
Formal Finance Sector
• Cooperatives/Credit Unions may be more active in providing financial services to
the poor.
• More commercial banks may participate both in microfinance wholesale and
retailing. They may have separate staff and windows to serve the poor.

34. Sustainability of Microfinance
Conducive Policy Reform Environment
• Interest rate reforms for microcredit and savings
• Flexible Environment to accommodate a wide array of microfinance service
providers to meet diverse demand
• Redefining the role of the state in microfinance development to facilitate the
participation of private sector
• Non-financial policies like agricultural pricing and taxation of micro-enterprises
Developing Viable Microfinance Institutions
• Ownership and governance, Management information systems and accounting
policies and practices
• Diversified products and services
• Management of portfolio quality and growth
• Systems, procedures and financial technology for reducing transaction costs and
Training facilities
Social Intermediation
• Awareness-building programs on a broad range of microfinance services;
• Information dissemination among service providers
• Basic literacy, numeracy and skills training for women, ethnic minorities and other
disadvantaged groups
• Social mobilization for the formation of community-based organizations and
solidarity groups

35. Role of Private Sector Investment
MFI funding gap in India
• Funding gap for microfinance in India is huge. It similar to global levels.
• An increasing involvement of private sector investors is therefore a key medium-
term priority to scale up microfinance.
• Total foreign MFI funding of both IFIs and private sector investors is expected to
increase to US$25 billion by 2015, IFI accounting for US$5 billion or 20% of total.
The main drivers of investment
• Increasing institutional and retail investor demand
• Regulatory changes & enhanced capability of MFIs to absorb commercial funding.
Core assumptions underlining the forecast
• Increased attractiveness for Private Investor to MFS, either due to the dual nature
of microfinance or solely their attractive risk-return profile
• Continued sharp rise in socially responsible investments providing extra growth
impetus.
• Changes in the regulatory framework will increasingly attract retail investors
• Increased number of joint investment activities of public and private investors,
with public investments ideally acting as multiplier for private sector investments
• Use of structured debt instruments will allow involvement of risk-averse
commercial investors
• Increased attractiveness to institutional investors such as pension funds,
insurance companies or trusts as supplement to their portfolios

36. Reasons for Failure to fulfill the desired objective
Urban Microfinance
Rating of Microfinance Institutions
SPECIAL ISSUES

37. Reasons for Failure to fulfill the desired objective
Availability of less risky and more rewarding customers
• MFIs are funding hawkers and traders branded as poor in urban and semi-urban and even in
villages as paying capacity of these customer is good
• Farmers are avoided due to seasonal and unpredictable income source.
Opportunity to become intermediaries of commercial banks
• Banks avoid such lending but are under compulsion of governments and regulators to shore
up mandatory requirement percentages .
• Foreign banks provide facilities to securitize these loans with some discounts to ease the
burden of statutory as well as corporate social responsibility.
Providing short term loans based on cash trading transactions
• These transactions generally get paid and hence no default or least number of default arises;
• Such short term transactions help creation of group lending and group guarantee both
informally and formally without much persuasion.
Resistant to loan Farmers
• Farming is not yet become viable due to dependence on monsoon, inadequate irrigation
facilities and lack of modernizing farming
• Lack of knowledge of shift in technology in cropping pattern and irrigation as well as soil
maintenance and development.
Wrong MFI assessment tools
• MFIs are still assessed on the basis of their coverage, profitability and high level of
repayment index
• They should be assessed on success in achieving their primary goals poverty alleviations and
inclusive growth.

38. Urban Microfinance
• High proportion of wage earner among urban poor
• Average family size is 5 with a monthly expenditure of Rs5000.
• 67% of the household live in their own house and 29% in the house they rent.
Clients • 31% of the household run at least one business.
• 69% of the households have at least one outstanding loan.
• Loans are taken from moneylenders (49%), family members (13%), and friends
or neighbors (28%). Rarely commercial source
• Quicker scale up and Quicker breakeven
• Higher loan sizes / enterprise loans
• Individual lending possible in urban areas
Opportunities • Technology can be better harnessed to provide financial services
• Greater economic opportunities / markets
• Microfinance has a role to play in alleviating the housing shortages that create
slums in the first place.
• No dedicated fund for capacity building, technical assistance to support growth
of urban microfinance
• Does not have NABARD, as it is readily available for rural microfinance.
Challenges • Poor in the urban have access to savings but they do not have access to loans.
• Only big MFIs can begin operation as loan size & start up cost will be higher in
cities
• Highly competitive because of the presence of the financial major players

39. Rating of Microfinance Institutions
Need for Rating
• Enable its clients to set professional benchmarks and standards
• External commercial funding like PE, VC, securitization and IPO
• Design programs that helps deepen the rural financial markets
Micro-Credit Ratings International Ltd. (M-CRIL)
• Specialized rating and microfinance research agency that has pioneered and successfully
introduced the rating of Microfinance Institutions (MFIs) in Asia.
• M-CRIL undertakes ratings on creditworthiness and organizational assessments)and also
proprietary sectoral research
Indicators for rating
• Governance and strategy: The assessment depends on the quality and
appropriateness of the board composition, its role and overall organizational strategy.
• Management systems: are rated on the quality of human resources, the strength of
critical systems like accounting and management information, staff productivity and
ensuring compliance
• Financial performance: evaluation requires the rating team to construct financial
statements, based on internationally accepted prudential norms, to present a fair
picture of the operations.
• MFIs financial strength based on aspects like repayment performance, asset quality,
liquidity, Asset Liability Management (ALM) and profitability.

40. Abbreviations
References
ANNEXURE

41. Abbreviations
Abbreviation Meaning
MFI Microfinance Institutions
NGO Non-Governmental Organisation
SHG Small Help Group
NABARD National Bank for Agriculture and Rural Development
SIDBI Small Industrial Development Bank of India
ADB Asian Development Bank
RBI Reserve Bank of India
PSU Public Sector Unit
NBFC Non-Banking Financial Company
JLG Joint Liability Group
PE Private Equity
VC Venture Capital
IT Income Tax

42. References (1/5)
• ABN AMRO (2007). Presentation regarding Community Engagement and Microfinance
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47. Thank You