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MICROFINANCEITS
OPPORTUNITIES AND LIMITATIONS
Nishant Bali
IBS Ahemedabad
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AGENDA Scenario of Micro Finance in India.
Micro-Credits model.
Business model ofGrameen Bank
Self Help Groups (SHGs).
Difference between JLGs and SHGs
NABARD initiatives in Micro finance.
Business Model of SAKHI.
Credit institutions as a Political tool: Debt relief in India.
MFIs being criticized because of high interest rates.
SWOT Analysis of Micro Finance
Interview of End Users
Future of Micro Finance
Learning from the Project
Conclusion.
Learning from the Company
References.
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SCENARIO OF MICRO FINANCE IN INDIA
Indias population is more than 1000 million, around 350 million,are living below the poverty.
Only 20% access loan from the formal sources and 80%from theinformal sources.
Out of that 20% only 10% have access to Micro finance.
Annual credit demand by the poor is estimated to be about Rs60,000 crores. And only 12,000 crores are disbursed. (April 09)
Customers of Micro Finance are Small and marginal farmers", "rural artisans" and "economically weaker sections
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MICRO-CREDITS MODEL
Focus on, providing the capital for poor women to use their innate"survival skills" to pull themselves out of poverty.
Lend mostly to women in small groups (credit circles), say of five orseven.
Draw up a weekly or bi-weekly repayment schedule.
In case any member defaults the entire circle is denied access to credit
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BUSINESS MODEL OF GRAMEEN BANK
Introduction
The Grameen Bank started in 1976 by the Nobel Laureate, ProfessorMuhammad Yunus in Bangladesh .
Grameen today has some 2,468 branches in Bangladesh, with a staff of24,703 people serving 7.34 million borrowers from 80,257 villages.
Grameens methods are applied in 58 countries including the UnitedStates.
Grameen Bank borrowers own 94% of the Bank. The remaining 6% areowned by the government. (January 09)
Working model of Grameen bank:
Manager first makes a round to the appointed area to introduce Grameenpolicies and programs.
Try to make the group of 5 people.
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CONTIu. Only two members can obtain loan at first. After 6 weeks of successful
repayment another two can apply for loan. The leader can only receiveloan at last.
Repayment responsibility solely rests on the individual borrower.
However if one member of a group defaults, that group will never receive aloan from Grameen
Two popular scheme by Grameen Bank is:-
Loan Insurance:-
Beggars Loan:-
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|16 DECISIONS}
Sources: www.Grameen-info.org
1. We shall follow and advance the four principles of Grameen Bank: Discipline, Unity,Courage and Hard work in all walks of our lives.
2. Prosperity we shall bring to our families.3. We shall not live in dilapidated houses. We shall repair our houses and work towardsconstructing new houses at the earliest.4. We shall grow vegetables all the year round. We shall eat plenty of them and sell thesurplus.5. During the plantation seasons, we shall plant as many seedlings as possible.6. We shall plan to keep our families small. We shall minimize our expenditures. We shalllook after our health.7. We shall educate our children and ensure that they can earn to pay for their education.8. We shall always keep our children and the environment clean.9. We shall build and use pit-latrines.10. We shall drink water from tube wells. If it is not available, we shall boil water or usealum.11. We shall not take any dowry at our sons' weddings; neither shall we give any dowry atour daughter's wedding. We shall keep our centre free from the curse of dowry. We shall not
practice child marriage.12. We shall not inflict any injustice on anyone; neither shall we allow anyone to do so.13. We shall collectively undertake bigger investments for higher incomes.14. We shall always be ready to help each other. If anyone is in difficulty, we shall all helphim or her.15. If we come to know of any breach of discipline in any centre, we shall all go there andhelp restore discipline.
16. We shall take part in all social activities collectively .Sources: www.Grameen-info.org
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CONTIu.
The Repayment Mechanism:
One year loan .
Equal weekly installments .
Repayment starts one week after the loan .
Repayment amounts to 2% per week for fifty weeks .
Criticism of Grameen Bank:
There are rumors that there repayment rate are fake.
Grameen Bank clients used their loans for many different purpose .e.g..Dowry,gambling etc.
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THE SELF HELP GROUP (SGH)
SHGs is a small group of rural poor, who have voluntarily comeforward to form a group for improvement of the social and economic
status of the members.
Homogeneous group of about 15 to 20.
Every member to save small amounts regularly.
Every member learns prioritization and financial discipline.
Condition required for membership for SHGs
Members should be between the age group of 21-60 years.
From one family, only one person can become a member of an SHG.(More families can join SHGs this way).
The group normally consists of either only men or only women.
Members should be homogenous i.e. should have the same social andfinancial background.
Members should be rural poor.
How SHG works ( practical example)
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DIFFERENCEBETWEEN JLGS AND SHGS
Joint Liability Group (JLG) is a group of individuals coming together toborrow from the financial institution.
Sources :Survey on SAKHI
SHGs (SelfHelp Groups) JLGs (Joint LiabilityGroups)
Minimum 15 members andmaximum 20.
Minimum 3 members andmaximum 5.
Meeting is compulsory. No necessary of compulsorymeeting.
Bank loan is available. They get loans only from MFIs.
Gets the benefit of governmentscheme.
Individual responsibility.
There is no benefit.
They share responsibility and standas guarantee for each other.
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NABARD INITIATIVES IN MICRO FINANCE
National Bank for Agriculture and Rural Development (NABARD)was established as an apex rural development bank in the year 1982,through an Act of Parliament.
Role and Function of NABARD:
Providing Refinance to lending institutions in rural areas.
Evaluating, monitoring and inspecting the client banks. Providing support to NGOs through a variety of schemes.
Making model projects / development schemes for banks and farmers
It prepares, on annual basis, rural credit plans for all districts in thecountry.
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ORGANIZATIONAL STRUCTURE
Board of Director
Chairman
Managing Director
Executive Director(4)
Head Office
Dept (24)
Regional Offices(28) Training Establishment(6)
Sub Office(Andaman &
Nicobar) & Special cell
(Srinagar)
District Development
Offices (391)
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Financial Santa Clause (NABARD)
(NABARD) was established in 1982,with an initial capital of 1400 crores.
And till March 30, 09 it reached to Rs 1, 00,000 crores with the surplus of Rs
1400 crores. Its Reserve and Surplus increased by 10.26% from 07 to 08, and its Cash and
Bank balance and Investment increased by 40.16% and 15.5%. (sources :nabard.org)
From where NABARD gets the fund?
How NABARD gives loan to the Institutions?
NABARD follows the very strange way of providing the loans.
They give loans to the every ODD number institution i.e.3, 5, 7, 9.
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HOW NABARD MANAGE THEIR REPAYMENT
STRUCTURE?
Their Repayment ratio is more than 95%.
NABARD see the credit rating of that institute given by the ratingagency.
NABARD analyze the balance sheet and profit and loss statement ofthe borrowing institutes.
NABARD sees the past record of the borrowing institutes, theirrepayment ratio and the executives who are working in that institutes.
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BUSINESS MODEL OF SAKHI
Introduction
SAKHI (An Organization for Women) , established in the year 2002.
Started by veteran Mrs. Alpa Chauhan.
SAKHI is having three office .(1 ) Dakoor (2 ) Umreth (3) Dahood.
Role and function of SAKHI
Provide loan to the economic disadvantage people. Help them in creating groups.
Provide them Micro plus loans.
Help them in establishing their(borrowers) business.
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ORGANIZATION STRUCTURE SAKHI had developed a systematic organizational structure for itself.
Brach Structure
Brach Manager
Board of Trustees
CEO
HR Mgr OperationMgr
Finance Mgr Audit Mgr Admin Mgr
Area Mgr
Brach Mgr
FCOs
Audit Team
A/C MISOfficer
FCO-JLG FCO FCO-GRLN
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HOW SAKHI DISBURSE THE LOANS?Loan Size:
Cycle I Rs 3000-Rs 5000
Cycle II Upto Rs 8000
Cycle-III Upto Rs 12,000
Cycle- IV Upto Rs 15,000
Duration in months 12
Minimum Loan size Rs 3000
Maximum Loan size Rs 15,000
Repayment Frequency Monthly
Rateof interest (P.a) 18%
Upfront loan proceedingfees
2%
Security Group guarantee followed bycentre guarantee
Sources: Survey on SAKHI
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HOW SAKHI RAISE CAPITAL?
Friends of Women World Bank.(FWWB) (13.5% p.a ).
Indian Bank(13.75% p.a).
Why SAKHI charges such a high rate of interest (18% p.a)?
The loan doesnt disburse immediately.
SAKHI charges same rate, even if above hike there rates. High transaction and operating cost.
Is government waiver plan effected there Institution?
That rule was only for government institution.
But borrowers also requested them to waive their loan amount.
Practical example of interest calculation.
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DEBT RELIEF IN INDIA
Political intervention creates serious threat for MFIs.
Easy and Safest way to attract the voters.
Borrowers creates a negative mind set.
The waiver of farm loans , increased defaulters.
Many decent borrowers has effected by this waive of schemes.
Legacy continue, Rs 60,000 crore was declared by Shri P.Chitambaram.
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MFIS BEING CRITICIZED BECAUSE OF
HIGH INTEREST RATES:
Most MFIs financially sustainable by charging interest rates that arehigh 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 makesmicroloans:
The cost of the money that it lends.
The cost of loan defaults.
Transaction and Operating cost.
Practical Example of rate calculation
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CONTIuu.
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, andRs 55 for a loan of Rs 500. And the third cost i.e. transaction cost.:Example
Suppose that the transaction cost is Rs 15per loan and that the loans
are for one year. To break even on the Rs 500
loan, the MFIwouldneed to collect interestof Rs 50 + Rs 5 + Rs 15 = Rs 70, whichrepresents an annual interest rate of 13 percent. To break even on theRs 100 loan, the MFIwould need to collect interestof Rs 10 +Rs 1 +Rs 15 = Rs 26, which is an interest rate of 26 percent.
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RATE CEILINGS: NOT THE ANSWER
There is hue and cry on the high rate of interest which is beign
charged by many MFIs.
Policymaker concern over high interest rates.
What are the reasons why rate ceiling can create disaster?
Rate ceiling will diminishing the return of MFIs. If rates are set to a level less than that required to cover costs, it will lead
to losses and also reduce their creditworthiness and ability to borrow.
Compelled rate ceiling would increase more poverty in the economy.
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SWOT ANALYSIS OF MICRO FINANCE Strength
Helped in reducing the poverty.
Huge networking available.
Weakness
Not properly regulated.
High number of people access to informal sources of finance.
Concentrating on few people only and mainly in urban areas.
Opportunity
Huge demand and supply gap.
Employment Opportunity.
Huge Untapped Market.
Opportunity for Pvt. Banks, NBFCs, Foreign Banks to enter this businesssegment.
Threat
High Competition.
Neophyte Industry.
Over involvement of Govt.
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INTERVIEW OF END USERS
Are you a regular or new customer?
If you are a Regular customer, then can you please tell meyourexperience?
Whats your opinion on interest rates?
What you do with that loan amount?
Does the Microfinance Institutions provide you any type of otherbenefits other than just loan Amount?
According to you which is better, loan from local Zamidars or fromMFIs?
Have youever faced any violation on you, if you were notable torepay the loan amount?
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FUTURE OF MICRO FINANCE
Estimated that in next five years, 65% of the poor people will have excessto 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 getreduced in the next 5 years.(World Bank report)
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LEARNING FROM THE PROJECT
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 deliverychannels.
Practical learning of how SHGs are formed.
Practical learning of how the MFIs works.
Most important learning, how it can change the life of the Economic
disadvantaged people.
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CONCLUSION
Dont wait, the time will never be just right. Start where you stand andwork with whatever tools you may have at your commands and thebetter tolls will be found as you go along.
William Surds
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LEARNING FROM THE COMPANY
Practical learning of Equity, Future & Options market by terminaltrading.
Various strategies of Market.
Apart from Micro Finance, Nine mine projects, which helped to
relate to the Present Market conditions.
And the most important thing I learnt from this institution isPatience
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THANK YOU
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REFERENCES
Mr. Sanjiv Rohilla Mr. Arvind Parmar
Asst. General Manager Operation Manager
NABARD SAKHI
Anand. Umreth
Ph No. 9427109121 Ph No. 9925153226
Websites:
www.ifmr.ac.in Mr. Mukesh Gandhi
www.google.com Director
www.microfinanceinsight.com MAS Finance www.investopedia.com Ahemedabad
www.books.google.com Ph No.9825009793
www.seepnetwork.org
www.forbes.com
www.nationmaster.com
www.thaindian.com
www.authorstream.com
www.knowledge.allianz.com
www.familiesinbusiness.net
www.indiamicrofinance.com
www.gdrc.org Research paper by Prabhu Ghate
Research paper by Vishal Sehgal
Presentation by N. Srinivasan