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EXECUTIVE SUMMARY
The imagination, with which microfinance was put into practice, has been turning into a reality
in India. The unparalleled growth of microfinance institutions, to cover a vast majority of
unbanked population in need of financial services, is just a step towards achieving the goals ofdevelopment for building an equitable society. Microfinance initiatives have been accepted at
different levels viz. the policy makers, the regulators and the implementers, as an effective way
to address the financial needs of the poor. The crucial role of microfinance in alleviating
poverty and need for an enabling regulation for microfinance sector has been acknowledged by
various high-level government committees.
In India too the formal financial institutions have not been able to reach the poor households,
and particularly women, in the unorganised sector. Structural rigidities and overheads lead to
high cost of making small loans. Organisational philosophy has not been oriented towards
recognising the poor as credit worthy. The problem has been compounded by low level of
influence of the poor, either about their credit worthiness or their demand for savings services.
Micro-finance programmes have often been implemented by large banks at government behest.
Low levels of recovery have been further eroded due to loan waiver programmes leading to
institutional disenchantment with lending to small borrowers.
All this gave rise to the concept of micro-credit for the poorest segment along with a new set of
credit delivery techniques. With the support of NGOs an informal sector comprising small Self
Help Groups (SHGs) started mobilizing savings of their members and lending these resources
among the members on a micro scale. The potential of these SHGs to develop as local financial
intermediaries to reach the poor has gained recognition due to their community based
participatory approach and sustainability - recovery rates have been significantly higher than
those achieved by commercial banks inspite of loans going to poor, unorganised individuals
without security or collateral.
Microfinance has proven to be a very effective development tool because it provides
empowerment instead of charity. Typically, microfinance clients are self-employed household
entrepreneurs who lack the resources to invest in their business and their future and thus cannot
escape the grips of extreme poverty. MFIs could play a significant role in facilitating inclusion,
as they are uniquely positioned in reaching out to the rural poor. Many of them operate in a
limited geographical area, have a greater understanding of the issues specific to the rural poor,
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enjoy greater acceptability amongst the rural poor and have flexibility in operations providing a
level of comfort to their clientele.
The main idea behind microfinance is that poor people, who can provide no collateral, should
have access to some sort of financial services. Microfinance began with microcredit: the
provision of small loans to very poor families to help them engage in productive and self-
sustaining activities. Since the successful initiation of formalised microcredit in the 1980s a
number of other complementary services have popped up around the globe, including micro
savings, micro insurance etc.
Microfinance is not a solution to all the worlds problems, but seems to be effective in
encouraging entrepreneurship, increasing the income of the poorest and helping them to build
viable businesses. The sector is booming and there has never been so much attention given to
this sector. Furthermore, there seems to be a great deal of opportunity for young
professionals
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OBJECTIVE OF THE STUDY
OBJECTIVE OF STUDY
To understand the concept of Microfinance. To analyse the functioning of microfinance in India.Understand opportunities and challenges faced by microfinance in IndiaAnalyze the recent case of SKS Microfinance and study in depth about the hurdles
faced by these institutions.
Analyze in depth the recommendations made by the RBI appointed MalegamCommittee.
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INTRODUCTION
Microfinance is defined as any activity that includes the provision of financial services such as
credit, savings, and insurance to low income individuals which fall just above the nationally
defined poverty line, and poor individuals which fall below that poverty line, with the goal ofcreating social value. The creation of social value includes poverty alleviation and the broader
impact of improving livelihood opportunities through the provision of capital for micro
enterprise, and insurance and savings for risk mitigation and consumption smoothing. A large
variety of actors provide microfinance in India, using a range of microfinance delivery methods.
Since the ICICI Bank in India, various actors have endeavoured to provide access to financial
services to the poor in creative ways. Governments also have piloted national programs, NGOs
have undertaken the activity of raising donor funds for on-lending, and some banks havepartnered with public organizations or made small inroads themselves in providing such
services. This has resulted in a rather broad definition of microfinance as any activity that
targets poor and low-income individuals for the provision of financial services. The range of
activities undertaken in microfinance include group lending, individual lending, the provision
of savings and insurance, capacity building, and agricultural business development services.
Whatever the form of activity however, the overarching goal that unifies all actors in the
provision of microfinance is the creation of social value.
1.1 Microfinance DefinitionAccording to International Labour Organization (ILO), Microfinance is an economic
development approach that involves providing financial services through institutions to low
income clients.
In India, Microfinance has been defined by The National Microfinance Taskforce, 1999 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.
"The poor stay poor, not because they are lazy but because they have no access to capital."
The dictionary meaning of finance is management of money. The management of money
denotes acquiring & using money. Microfinance is buzzing word, used when financing for
micro entrepreneurs. Concept of microfinance has emerged in order to meet the special goal of
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empowering under-privileged class of society, women, and poor, downtrodden by natural
reasons or manmade; caste, creed, religion or otherwise. The principles of Microfinance are
founded on the philosophy of cooperation and its central values of equality, equity and mutual
self-help. At the heart of these principles are the concept of human development and the
brotherhood of man expressed through people working together to achieve a better life forthemselves and their children.
Traditionally microfinance was focused on providing a very standardized credit product. The
poor, just like anyone else need a diverse range of financial instruments to be able to build
assets, stabilize consumption and protect themselves against risks. Thus, we see a broadening
of the concept of microfinance--- our current challenge is to find efficient and reliable ways of
providing a richer menu of microfinance products. Microfinance is not merely extending credit,
but extending credit to those who require most for themselves and theirs familys survival.
Who are the clients of microfinance?
The typical microfinance clients are low-income persons that do not have access to formal
financial institutions. Microfinance clients are typically self-employed, often household-based
entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in
small income-generating activities such as food processing and petty trade. In urban areas,microfinance activities are more diverse and include shopkeepers, service providers, artisans,
street vendors, etc. Microfinance clients are poor and vulnerable non-poor who have a
relatively unstable source of income.
Access to conventional formal financial institutions, for many reasons, is inversely related to
income: the poorer you are the less likely that you have access. On the other hand, the chances
are that, the poorer you are, the more expensive or onerous informal financial arrangements.
Moreover, informal arrangements may not suitably meet certain financial service needs or may
exclude you anyway. Individuals in this excluded and under-served market segment are the
clients of microfinance.
As we broaden the notion of the types of services microfinance encompasses, the potential
market of microfinance clients also expands. It depends on local conditions and political
climate, activeness of cooperatives, SHG & NGOs and support mechanism. For instance, micro
credit might have a far more limited market scope than say a more diversified range of financial
services, which includes various types of savings products, payment and remittance services,
and various insurance products. For example, many very poor farmers may not really wish to
borrow, but rather, would like a safer place to save the proceeds from their harvest as these are
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consumed over several months by the requirements of daily living. Central government in India
has established a strong & extensive link between NABARD (National Bank for Agriculture &
Rural Development), State Cooperative Bank, District Cooperative Banks, Primary Agriculture
& Marketing Societies at national, state, district and village level.
The Need for Microfinance in India
India is said to be the home of one third of the worlds poor; official estimates rangefrom 26 to 50 percent of the more than one billion population.
About 87 percent of the poorest households do not have access to credit. The demand for microcredit has been estimated at up to $30 billion; the supply is less
than $2.2 billion combined by all involved in the sector.
Due to the sheer size of the population living in poverty, India is strategically significant in the
global efforts to alleviate poverty and to achieve the Millennium Development Goal of halving
the worlds poverty by 2015. Microfinance has been present in India in one form or another
since the 1970s and is now widely accepted as an effective poverty alleviation strategy. Over
the last five years, the microfinance industry has achieved significant growth in part due to the
participation of commercial banks. Despite this growth, the poverty situation in India continues
to be challenging.
Some principles that summarize a century and a half of development practice were
encapsulated in 2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by the
Group of Eight leaders at the G8 Summit on June 10, 2004:
Poor people need not just loans but also savings, insurance and money transferservices.
Microfinance must be useful to poor households: helping them raise income, buildup assets and/or cushion themselves against external shocks.
Microfinance can pay for itself.Subsidies from donors and government are scarceand uncertain, and so to reach large numbers of poor people, microfinance must pay
for itself.
Microfinance means building permanent local institutions. Microfinance also means integrating the financial needs of poor people into a
countrys mainstream financial system. The job of government is to enable financial services, not to provide them.
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Donor funds should complement private capital, not compete with it. The key bottleneck is the shortage of strong institutions and managers. Donors
should focus on capacity building.
Interest rate ceilings hurt poor people by preventing microfinance institutions fromcovering their costs, which chokes off the supply of credit.
Microfinance institutions should measure and disclose their performance bothfinancially and socially.
Microfinance can also be distinguished from charity. It is better to provide grants to families
who are destitute, or so poor they are unlikely to be able to generate the cash flow required to
repay a loan. This situation can occur for example, in a war zone or after a natural disaster.
Financial needs and financial services
In developing economies and particularly in the rural areas, many activities that would be
classified in the developed world as financial are not monetized: that is, money is not used to
carry them out. Almost by definition, poor people have very little money. But circumstances
often arise in their lives in which they need money or the things money can buy.
In Stuart Rutherfords recent bookThe Poor and Their Money, he cites several types of needs:
Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding,widowhood, old age.
Personal Emergencies: such as sickness, injury, unemployment, theft, harassment ordeath.
Disasters: such as fires, floods, cyclones and man-made events like war or bulldozingof dwellings.
Investment Opportunities: expanding a business, buying land or equipment, improvinghousing, securing a job (which often requires paying a large bribe), etc.
Poor people find creative and often collaborative ways to meet these needs, primarily through
creating and exchanging different forms of non-cash value. Common substitutes for cash vary
from country to country but typically include livestock, grains, jewellery and precious metals.
As Marguerite Robinson describes in The Microfinance Revolution, the 1980s demonstrated
that microfinance could provide large-scale outreach profitably, and in the 1990s,
microfinance began to develop as an industry. In the 2000s, the microfinance industrys
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objective is to satisfy the unmet demand on a much larger scale, and to play a role in reducing
poverty. While much progress has been made in developing a viable, commercial microfinance
sector in the last few decades, several issues remain that need to be addressed before the
industry will be able to satisfy massive worldwide demand.
The obstacles or challenges to building a sound commercial microfinance industry include:
Inappropriate donor subsidies Poor regulation and supervision of deposit-taking MFIs Few MFIs that mobilize savings Limited management capacity in MFIs Institutional inefficiencies Need for more dissemination and adoption of rural, agricultural microfinance
methodologies
Role of Microfinance:
The micro credit of microfinance programme was first initiated in the year 1976 in Bangladesh
with promise of providing credit to the poor without collateral, alleviating poverty and
unleashing human creativity and endeavor of the poor people. Microfinance impact studies
have demonstrated that
Microfinance helps poor households meet basic needs and protects them against risks.
The use of financial services by low-income households leads to improvements in household
economic welfare and enterprise stability and growth.
By supporting womens economic participation, microfinance empowers women, thereby
promoting gender-equity and improving household well being.
The level of impact relates to the length of time clients have had access to financial services.
The Origin of Microfinance
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Although neither of the terms microcredit or microfinance were used in the academic literature
nor by development aid practitioners before the 1980s or 1990s, respectively, the concept of
providing financial services to low income people is much older.
While the emergence of informal financial institutions in Nigeria dates back to the 15th
century,they were first established in Europe during the 18th century as a response to the enormous
increase in poverty since the end of the extended European wars (1618 1648). In 1720 the
first loan fund targeting poor people was founded in Ireland by the author Jonathan Swift. After
a special law was passed in 1823, which allowed charity institutions to become formal financial
intermediaries a loan fund board was established in 1836 and a big boom was initiated. Their
outreach peaked just before the government introduced a cap on interest rates in 1843. At this
time, they provided financial services to almost 20% of Irish households. The creditcooperatives created in Germany in 1847 by Friedrich Wilhelm Raiffeisen served 1.4 million
people by 1910. He stated that the main objectives of these cooperatives should be to control
the use made of money for economic improvements, and to improve the moral and physical
values of people and also, their will to act by themselves.
In the 1880s the British controlled government of Madras in South India, tried to use the
German experience to address poverty which resulted in more than nine million poor Indians
belonging to credit cooperatives by 1946. During this same time the Dutch colonial
administrators constructed a cooperative rural banking system in Indonesia based on the
Raiffeisen model which eventually became Bank Rakyat Indonesia (BRI), now known as the
largest MFI in the world.
Microfinance Today
In the 1970s a paradigm shift started to take place. The failure of subsidized government or
donor driven institutions to meet the demand for financial services in developing countries let
to several new approaches. Some of the most prominent ones are presented below.
Bank Dagan Bali (BDB) was established in September 1970 to serve low income people in
Indonesia without any subsidies and is now well-known as the earliest bank to institute
commercial microfinance. While this is not true with regard to the achievements made in
Europe during the 19th century, it still can be seen as a turning point with an ever increasing
impact on the view of politicians and development aid practitioners throughout the world. In
1973 ACCION International, a United States of America (USA) based nongovernmental
organization (NGO) disbursed its first loan in Brazil and in 1974 Professor Muhammad Yunus
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started what later became known as the Grameen Bank by lending a total of $27 to 42 people in
Bangladesh. One year later the Self-Employed Womens Association started to provide loans
of about $1.5 to poor women in India. Although the latter examples still were subsidized
projects, they used a more business oriented approach and showed the world that poor people
can be good credit risks with repayment rates exceeding 95%, even if the interest rate chargedis higher than that of traditional banks. Another milestone was the transformation of BRI
starting in 1984. Once a loss making institution channelling government subsidized credits to
inhabitants of rural Indonesia it is now the largest MFI in the world, being profitable even
during the Asian financial crisis of 19971998.
In February 1997 more than 2,900 policymakers, microfinance practitioners and representatives
of various educational institutions and donor agencies from 137 different countries gathered in
Washington D.C. for the first Micro Credit Summit. This was the start of a nine year longcampaign to reach 100 million of the world poorest households with credit for self employment
by 2005. According to the Microcredit Summit Campaign Report 67,606,080 clients have been
reached through 2527 MFIs by the end of 2002, with 41,594,778 of them being amongst the
poorest before they took their first loan. Since the campaign started the average annual growth
rate in reaching clients has been almost 40 percent. If it has continued at that speed more than
100 million people will have access to microcredit by now and by the end of 2005 the goal of
the microcredit summit campaign would be reached. As the president of the World Bank James
Wolfensohn has pointed out, providing financial services to 100 million of the poorest
households means helping as many as 500600 million poor people.
Strategic Policy Initiatives
Some of the most recent strategic policy initiatives in the area of Microfinance taken by the
government and regulatory bodies in India are:
Working group on credit to the poor through SHGs, NGOs, NABARD, 1995 The National Microfinance Taskforce, 1999 Working Group on Financial Flows to the Informal Sector (set up by PMO), 2002 Microfinance Development and Equity Fund, NABARD, 2005 Working group on Financing NBFCs by Banks- RBI
Activities in Microfinance
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Microcredit: It is a small amount of money loaned to a client by a bank or other institution.
Microcredit can be offered, often without collateral, to an individual or through group lending.
Micro savings: These are deposit services that allow one to save small amounts of money for
future use. Often without minimum balance requirements, these savings accounts allow
households to save in order to meet unexpected expenses and plan for future expenses.
Micro insurance: It is a system by which people, businesses and other organizations make a
payment to share risk. Access to insurance enables entrepreneurs to concentrate more on
developing their businesses while mitigating other risks affecting property, health or the ability
to work.
Remittances: These are transfer of funds from people in one place to people in another, usuallyacross borders to family and friends. Compared with other sources of capital that can fluctuate
depending on the political or economic climate, remittances are a relatively steady source of
funds.
Legal Regulations
Banks in India are regulated and supervised by the Reserve Bank of India (RBI) under the RBI
Act of 1934, Banking Regulation Act, Regional Rural Banks Act, and the CooperativeSocieties Acts of the respective state governments for cooperative banks.
NBFCs are registered under the Companies Act, 1956 and are governed under the RBI Act.
There is no specific law catering to NGOs although they can be registered under the Societies
Registration Act, 1860, the Indian Trust Act, 1882, or the relevant state acts. There has been a
strong reliance on self-regulation for NGO MFIs and as this applies to NGO MFIs mobilizing
deposits from clients who also borrow. This tendency is a concern due to enforcement
problems that tend to arise with self-regulatory organizations. In January 2000, the RBIessentially created a new legal form for providing microfinance services for NBFCs registered
under the Companies Act so that they are not subject to any capital or liquidity requirements if
they do not go into the deposit taking business. Absence of liquidity requirements is concern to
the safety of the sector.
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Legislation Affecting Institutions Engaged in Micro-Finance (Directly or indirectly)
The Legal formats of MFIs that are provided by Indian law can be classified by the profit
motive:
Not-For-Profit Entities are trusts, societies and section 25 companies.
For-Profit enterprises are Non-Banking Financial Companies (NBFCs).
The following legislations regulate the functioning of MFIs in India
(i) Reserve Bank of India Act, 1934
The Reserve Bank of India Act 1934 establishes the central bank (Banking RegulatoryAuthority of India). It is of interest to the question of the regulation of micro-finance in that
under a 1977 Amendment it contains provisions for the establishment and operations of non-
bank finance companies (Chapter 3-B, Sections 45-I). The non-banking institutions can be a
company, a corporation or a cooperative society. A non-bank financial company (NBFC) is a
non-banking institution company and takes deposits. NBFCs are registered under this Act
(Second Schedule).
(ii) Banking Regulation Act 1949
The Banking Regulation Act 1949 covers banking companies. It does not apply to primary
agriculture credit societies, cooperative land mortgage banks and any other cooperative society.
It is not directly relevant to micro-finance, other than the fact that it coves local area banks and
commercial banks, which are involved in linkage operations. The Banking Regulation Act
provides the basis for the licensing of local area banks and mutual benefit societies.
(iii) Companies Act 1956
The companies Act 1952 provides the basis for the incorporation of Local Area Banks, Non-
Bank Finance Companies, non-for- profit Section 25 Companies and Nidhis under Section
620.
Certain revisions have been proposed in the Companies Act which would allow cooperatives in
the form of companies and could offer micro-finance services
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Co-operative Societies Act of 1904; Mutually Aided Co-operative Societies Act in 1995
(Andhra Pradesh) Societies Registration Act of 1860 and Indian Trusts Act -1882.
The term cooperative covers a range of institutions, both formal (stated -owned cooperatives
banks) and semi-formal (cooperative societies), which are regulated and/or unregulated.
Enterprises registered under the Societies registration or Indian Trusts Acts are semi-formal
institutions engaged in micro-finance. The Acts do not provide a basis for any of regulation so
far. There is a tax problem in that societies and trusts cannot engage in for-profit activities,
including financial services.
Co-operative Societies Act of 1904 covers cooperative, SEWA Bank is registered as a co-
operative society, under this act but is regulated by the RBI from which it obtained a bankinglicense.
With the post liberalization era, market-oriented approach to rural finance advocated a new
form of co-operative societies act. Andhra Pradesh enacted the mutually Aided Co-operative
Societies Act in 1995, allowing the formation of cooperatives largely immune from
government intervention. Three other States subsequently enacted similar legislation (Bihar,
Madhya Pradesh and Jammu & Kashmir). The Multi-State Co-operatives Societies Bill Act
2002 is operative currently and it replaces the MCS Act, 1984.
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STRUCTURE OF MICROFINANCE INSTITUTION IN INDIA
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MICROFINANCE IN INDIA
Microfinance changing the face of poor India
Micro-Finance is emerging as a powerful instrument for poverty alleviation in the new
economy. In India, micro-Finance scene is dominated by Self Help Groups (SHGs) - Banks
linkage Programme, aimed at providing a cost effective mechanism for providing financial
services to the 'unreached poor'. In the Indian context terms like "small and marginal farmers",
" rural artisans" and "economically weaker sections" have been used to broadly define micro-
finance customers. Research across the globe has shown that, over time, microfinance clients
increase their income and assets, increase the number of years of schooling their children
receive, and improve the health and nutrition of their families.
A more refined model of micro-credit delivery has evolved lately, which emphasizes the
combined delivery of financial services along with technical assistance, and agricultural
business development services. When compared to the wider SHG bank linkage movement in
India, private MFIs have had limited outreach. However, we have seen a recent trend of larger
microfinance institutions transforming into Non-Bank Financial Institutions (NBFCs). This
changing face of microfinance in India appears to be positive in terms of the ability of
microfinance to attract more funds and therefore increase outreach.
In terms of demand for micro-credit or micro-finance, there are three segments, which demand
funds. They are:
At the very bottom in terms of income and assets, are those who are landless andengaged in agricultural work on a seasonal basis, and manual labourers in forestry,
mining, household industries, construction and transport. This segment requires,
first and foremost, consumption credit during those months when they do not get labour
work, and for contingencies such as illness. They also need credit for acquiring small
productive assets, such as livestock, using which they can generate additional income.
The next market segment is small and marginal farmers and rural artisans, weaversand those self-employed in the urban informal sector as hawkers, vendors, and
workers in household micro-enterprises. This segment mainly needs credit for
working capital, a small part of which also serves consumption needs. This segment
also needs term credit for acquiring additional productive assets, such as irrigation
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pump sets, bore wells and livestock in case of farmers, and equipment (looms,
machinery) and work sheds in case of non-farm workers.
The third market segment is of small and medium farmers who have gone in forcommercial crops such as surplus paddy and wheat, cotton, groundnut, and others
engaged in dairying, poultry, fishery, etc. Among non-farm activities, this segment
includes those in villages and slums, engaged in processing or manufacturing activity,
running provision stores, repair workshops, tea shops, and various service enterprises.
These persons are not always poor, though they live barely above the poverty line and
also suffer from inadequate access to formal credit.
Well these are the people who require money and with Microfinance it is possible. Right now
the problem is that, it is SHGs' which are doing this and efforts should be made so that the big
financial institutions also turn up and start supplying funds to these people. This will lead to a
better India and will definitely fulfil the dream of our late Prime Minister, Mrs. Indira
Gandhi, i.e. Poverty.
One of the statements is really appropriate here, which is as:
Money, says the proverb makes money. When you have got a little, it is often easy to get
more. The great difficulty is to get that little.Adams Smith.
Today India is facing major problem in reducing poverty. About 25 million people in India are
under below poverty line. With low per capita income, heavy population pressure, prevalence
of massive unemployment and underemployment, low rate of capital formation, misdistribution
of wealth and assets, prevalence of low technology and poor economics organization and
instability of output of agriculture production and related sectors have made India one of the
poor countries of the world.
Present Scenario of India:
India falls under low income class according to World Bank. It is second populated country in
the world and around 70 % of its population lives in rural area. 60% of people depend on
agriculture, as a result there is chronic underemployment and per capita income is only $ 3262.
This is not enough to provide food to more than one individual. The obvious result is abject
poverty, low rate of education, low sex ratio, and exploitation. The major factor account forhigh incidence of rural poverty is the low asset base. According to Reserve Bank of India,
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about 51 % of people house possess only 10% of the total asset of India .This has resulted low
production capacity both in agriculture (which contribute around 22-25% of GDP) and
Manufacturing sector. Rural people have very low access to institutionalized credit (from
commercial bank).
Poverty alleviation programmes and conceptualization of Microfinance:
There have been continuous efforts of planners of India in addressing the poverty. They have
come up with development programmes like Integrated Rural Development progamme (IRDP),
National Rural Employment Programme (NREP), Rural Labour Employment Guarantee
Programme (RLEGP) etc. But these progamme have not been able to create massive impact in
poverty alleviation. The production oriented approach of planning without altering the mode of
production could not but result of the gains of development by owners of instrument of
production. The mode of production does remain same as the owner of the instrument have low
access to credit which is the major factor of production. Thus in Nineties National bank for
agriculture and rural development (NABARD) launches pilot projects of Microfinance to
bridge the gap between demand and supply of funds in the lower rungs of rural economy.
Microfinance. The buzzing word of this decade was meant to cure the illness of rural economy.
With this concept of Self Reliance, Self Sufficiency and Self Help gained momentum. The
Indian microfinance is dominated by Self Help Groups (SHGs) and their linkage to Banks.
Deprived of the basic banking facilities, the rural and semi urban Indian masses are still relying
on informal financing intermediaries like money lenders, family members, friends etc.
Banking Expansion
Starting in the late 1960s, India was the home to one of the largest state interventions in the
rural credit market. This phase is known as the Social Banking phase.
It witnessed the nationalization of existing private commercial banks, massive expansion of
branch network in rural areas, mandatory directed credit to priority sectors of the economy,
subsidized rates of interest and creation of a new set of regional rural banks (RRBs) at the
district level and a specialized apex bank for agriculture and rural development (NABARD) at
the national level.
The Net State Domestic Product (NSDP) is a measure of the economic activity in the state andcomparing it with the utilization of bank credit or bank deposits indicates how much economic
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activity is being financed by the banks and whether there exists untapped potential for
increasing deposits in that state.
Microfinance Social Aspects
Micro financing institutions significantly contributed to gender equality and womens
empowerment as well as poor development and civil society strengthening. Contribution to
womens ability to earn an income led to their economic empowerment, increased well being of
women and their families and wider social and political empowerment.
Microfinance programs targeting women became a major plank of poverty alleviation and
gender strategies in the 1990s. Increasing evidence of the centrality of gender equality to
poverty reduction and womens higher credit repayment rates led to a general consensus on thedesirability of targeting women.
Self Help Groups (SHGs)
Self- help groups (SHGs) play today a major role in poverty alleviation in rural India. A
growing number of poor people (mostly women) in various parts of India are members of
SHGs and actively engage in savings and credit (S/C), as well as in other activities (income
generation, natural resources management, literacy, child care and nutrition, etc.). The S/Cfocus in the SHG is the most prominent element and offers a chance to create some control
over capital, albeit in very small amounts. The SHG system has proven to be very relevant and
effective in offering women the possibility to break gradually away from exploitation and
isolation.
How self-help groups work
NABARD (1997) defines SHGs as "small, economically homogenous affinity groups of rural
poor, voluntarily formed to save and mutually contribute to a common fund to be lent to its
members as per the group members' decision".
Most SHGs in India have 10 to 25 members, who can be either only men, or only women, or
only youth, or a mix of these. As women's SHGs or sangha have been promoted by a wide
range of government and non- governmental agencies, they now make up 90% of all SHGs.
The rules and regulations of SHGs vary according to the preferences of the members and those
facilitating their formation. A common characteristic of the groups is that they meet regularly
(typically once per week or once per fortnight) to collect the savings from members, decide to
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which member to give a loan, discuss joint activities (such as training, running of a communal
business, etc.), and to mitigate any conflicts that might arise. Most SHGs have an elected
chairperson, a deputy, a treasurer, and sometimes other office holders.
Most SHGs start without any external financial capital by saving regular contributions by the
members. These contributions can be very small (e.g. 10 Rs per week). After a period of
consistent savings (e.g. 6 months to one year) the SHGs start to give loans from savings in the
form of small internal loans for micro enterprise activities and consumption. Only those SHGs
that have utilized their own funds well are assisted with external funds through linkages with
banks and other financial intermediaries.
However, it is generally accepted that SHGs often do not include the poorest of the poor, for
reasons such as:
(a) Social factors (the poorest are often those who are socially marginalized because of caste
affiliation and those who are most sceptical of the potential benefits of collective action).
(b) Economic factors (the poorest often do not have the financial resources to contribute to the
savings and pay membership fees; they are often the ones who migrate during the lean season,
thus making group membership difficult).
(c) Intrinsic biases of the implementing organizations (as the poorest of the poor are the
most difficult to reach and motivate, implementing agencies tend to leave them out, preferring
to focus on the next wealth category).
Sources of capital and links between SHGs and Banks
SHGs can only fulfil a role in the rural economy if group members have access to financial
capital and markets for their products and services. While the groups initially generate their
own savings through thrift (whereby thrift implies savings created by postponing almostnecessary consumption, while savings imply the existence of surplus wealth), their aim is often
to link up with financial institutions in order to obtain further loans for investments in rural
enterprises. NGOs and banks are giving loans to SHGs either as "matching loans" (whereas the
loan amount is proportionate to the group's savings) or as fixed amounts, depending on the
group's record of repayment, recommendations by group facilitators, collaterals provided, etc.
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How SHGs save
Self-help groups mobilize savings from their members, and may then on-lend these funds to
one another, usually at apparently high rates of interest which reflect the members
understanding of the high returns they can earn on the small sums invested in their micro-
enterprises, and the even higher cost of funds from money lenders. If they do not wish to use
the money, they may deposit it in a bank. If the members need for funds exceeds the groups
accumulated savings, they may borrow from a bank or other organization, such as a micro-
finance non-government organization, to augment their own fund.
The system is very flexible. The group aggregates the small individual saving and borrowing
requirements of its members, and the bank needs only to maintain one account for the group as
a single entity. The banker must assess the competence and integrity of the group as a micro-
bank, but once he has done this he need not concern himself with the individual loans made by
the group to its members, or the uses to which these loans are put. He can treat the group as a
single customer, whose total business and transactions are probably similar in amount to the
average for his normal customers, because they represent the combined banking business of
some twenty micro-customers. Any bank branch can have a small or a large number of such
accounts, without having to change its methods of operation.
Unlike many customers, demand from SHGs is not price-sensitive. Illiterate village women are
sometimes better bankers than some with more professional qualifications. They know that
rapid access to funds is more important than their cost, and they also know, even though they
might not be able to calculate the figures, that the typical micro-enterprise earns well over
500% return on the small sum invested in it (Harper, M, 1997, p. 15). The groups thus charge
themselves high rates of interest; they are happy to take advantage of the generous spread that
the NABARD subsidized bank lending rate of 12% allows them, but they are also willing to
borrow from NGO/MFIs which on-lend funds from SIDBI at 15%, or from new generationinstitutions such as Basix Finance at 18.5% or 21%.
SHGs-Bank Linkage Model
NABARD is presently operating three models of linkage of banks with SHGs and NGOs:
Model 1: In this model, the bank itself acts as a Self Help Group Promoting Institution
(SHPI). It takes initiatives in forming the groups, nurtures them over a period of time and then
provides credit to them after satisfying itself about their maturity to absorb credit. About 16%
of SHGs and 13% of loan amounts are using this model (as of March 2002).
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Model2: In this model, groups are formed by NGOs (in most of the cases) or by government
agencies. The groups are nurtured and trained by these agencies. The bank then provides credit
directly to the SHGs, after observing their operations and maturity to absorb credit. While the
bank provides loans to the groups directly, the facilitating agencies continue their interactions
with the SHGs. Most linkage experiences begin with this model with NGOs playing a majorrole. This model has also been popular and more acceptable to banks, as some of the difficult
functions of social dynamics are externalized. About 75% of SHGs and 78% of loan amounts
are using this model.
Model 3: Due to various reasons, banks in some areas are not in a position to even finance
SHGs promoted and nurtured by other agencies. In such cases, the NGOs act as both
facilitators and micro- finance intermediaries. First, they promote the groups, nurture and train
them and then approach banks for bulk loans for on-lending to the SHGs. About 9% of SHGs
and 13% of loan amounts are using this model.
Life insurances for self-help group members
The United India Insurance Company has designed two PLLIs (personal line life insurances)
for women in rural areas. The company will be targeting self-help groups, of which there are
around 200,000 in the country, with 15-20 women in a group. The two policies are
(1) the Mother Teresa Women & Children Policy, with the aim of giving to the woman in the
event of accidental death of her husband and to support her minor children in the event of her
death, and
(2) The Unimicro Health Scheme, giving personal accident and hospitalization covers besides
cover for damage to dwelling due to fire and allied perils.
Microfinance Models
1. Microfinance Institutions (MFIs):MFIs are an extremely heterogeneous group comprising NBFCs, societies, trusts and
cooperatives. They are provided financial support from external donors and apex institutions
including the Rashtriya Mahila Kosh (RMK), SIDBI Foundation for micro-credit and
NABARD and employ a variety of ways for credit delivery.
Since 2000, commercial banks including Regional Rural Banks have been providing funds to
MFIs for on lending to poor clients. Though initially, only a handful of NGOs were into
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financial intermediation using a variety of delivery methods, their numbers have increased
considerably today. While there is no published data on private MFIs operating in the country,
the number of MFIs is estimated to be around 800.
Legal Forms of MFIs in India
Types of MFIs Estimated
Number*
Legal Acts under which Registered
1. Not for Profit MFIs
a.) NGO - MFIs
400 to 500 Societies Registration Act, 1860 or
similar Provincial Acts
Indian Trust Act, 1882
b.) Non-profit Companies 10 Section 25 of the Companies Act, 1956
2. Mutual Benefit MFIs
a.) Mutually Aided Cooperative
Societies (MACS) and similarly
set up institutions
200 to 250 Mutually Aided Cooperative Societies
Act enacted by State Government
3. For Profit MFIs
a.) Non-Banking Financial
Companies (NBFCs)
6 Indian Companies Act, 1956
Reserve Bank of India Act, 1934
Total 700 - 800
2. Bank Partnership ModelThis model is an innovative way of financing MFIs. The bank is the lender and the MFI acts as
an agent for handling items of work relating to credit monitoring, supervision and recovery. In
other words, the MFI acts as an agent and takes care of all relationships with the client, from
first contact to final repayment. The model has the potential to significantly increase the
amount of funding that MFIs can leverage on a relatively small equity base.
A sub - variation of this model is where the MFI, as an NBFC, holds the individual loans on its
books for a while before securitizing them and selling them to the bank. Such refinancingthrough securitization enables the MFI enlarged funding access. If the MFI fulfils the true
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sale criteria, the exposure of the bank is treated as being to the individual borrower and the
prudential exposure norms do not then inhibit such funding of MFIs by commercial banks
through the securitization structure.
3. Banking CorrespondentsThe proposal ofbanking correspondents could take this model a step further extending it to
savings. It would allow MFIs to collect savings deposits from the poor on behalf of the bank. It
would use the ability of the MFI to get close to poor clients while relying on the financial
strength of the bank to safeguard the deposits. This regulation evolved at a time when there
were genuine fears that fly-by-night agents purporting to act on behalf of banks in which the
people have confidence could mobilize savings of gullible public and then vanish with them. It
remains to be seen whether the mechanics of such relationships can be worked out in a way that
minimizes the risk of misuse.
4. Service Company ModelUnder this model, the bank forms its own MFI, perhaps as an NBFC, and then works hand in
hand with that MFI to extend loans and other services. On paper, the model is similar to the
partnership model: the MFI originates the loans and the bank books them. But in fact, this
model has two very different and interesting operational features:
(a) The MFI uses the branch network of the bank as its outlets to reach clients. This allows the
client to be reached at lower cost than in the case of a standalone MFI. In case of banks which
have large branch networks, it also allows rapid scale up. In the partnership model, MFIs may
contract with many banks in an arms length relationship. In the service company model, the
MFI works specifically for the bank and develops an intensive operational cooperation between
them to their mutual advantage.
(b) The Partnership model uses both the financial and infrastructure strength of the bank to
create lower cost and faster growth. The Service Company Model has the potential to take the
burden of overseeing microfinance operations off the management of the bank and put it in the
hands of MFI managers who are focused on microfinance to introduce additional products,
such as individual loans for SHG graduates, remittances and so on without disrupting bank
operations and provide a more advantageous cost structure for microfinance.
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THE LIST OF MICRO-FINANCE INSTITUTIONS IN INDIA
AsmithaProvides rural poor women access to financial resources in the form of collateral
free small loans for income generation and livelihood promotion. This enables them to set-off
small start up business, which soon translates into adequate nutrition, medical aid andeducation. With increased businesses, these low-income women become economic agents
intrinsic to development rather than simply homemakers
Bandhan MF- Bandhan was set up to address the dual objective of poverty alleviation and
women empowerment. The microfinance 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 Reserve Bank of India (RBI).That apart,
Bandhan is also engaged in development work through its not for profit entity.
Basix BASIX is a livelihood promotion institution established in 1996, working with over a
3.5 million customers, over 90% being rural poor households and about 10% urban slum
dwellers. BASIX operates in 17 states - Andhra Pradesh, Karnataka, Orissa, Jharkhand,
Maharashtra, Madhya Pradesh, Tamil nadu, Rajasthan, Bihar, Chhattisgarh, West Bengal,
Delhi, Uttarakhand, Sikkim, Meghalaya, Assam and Gujarat, 223 districts and over 39,251
villages. It has a staff of over 10,000 of which 80 percent are based in small towns and villages.
BASIX mission is to promote a large number of sustainable livelihoods, including for the rural
poor and women, through the provision of financial services and technical assistance in an
integrated manner. BASIX strategy is to provide a comprehensive set of livelihood promotion
services which include Financial Inclusion Services (FINS), Agricultural / Business
Development Services (Ag/BDS) and Institutional Development Services (IDS) to rural poor
households under one umbrella.
Cashpor IndiaOur mission is to identify and motivate poor women in the rural areas and to
deliver financial services to them in an honest, timely and efficient manner so that our Vision is
realized and CASHPOR itself becomes a financially sustainable microfinance institution for the
poor.
Grameen Foundation Works in 6 key areas: Connecting microfinance institutions with
capital markets, strengthening organizations by building people practices, harnessing the power
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of technology, helping track peoples movement out of poverty, sharing knowledge widely for
broader impact and Social Business
Grameen Koota Grameen Koota recognises the future competition and challenge of
retaining exclusivity of clients. Instead of targeting a high market share in high competition
areas we will focus on increasing the mind share amongst client and becoming a preferred
microfinance provider. We will leverage our existing goodwill with the community and have a
strong focus on orienting our field staff towards this objective.
Hand in Hand is a development organisation whose objective is to eliminate poverty by
creating enterprises and jobs. Focusing on help to self-help, we take a holistic approach that
combines microfinance and support for women to start enterprises with work in four other areas
that matter most to poor communities: education and child labour elimination, health and
sanitation, a sustainable local environment and information technology access. With currently
more than 450,000 members in Tamil Nadu, Karnataka and Madhya Pradesh, who have
collectively started more than 250,000 micro-enterprises, our goal is to create 1.3 million jobs
by 2013. Supported by international offices in the UK and Sweden, we are now taking our
model to South Africa, Afghanistan and Latin America.
Micro Credit India Microcredit Foundation of India (MFI) is a not-for-profit Section 25
Company in Tamil Nadu dedicated to promoting entrepreneurship and community level action
in rural areas as a means to sustainable economic prosperity. Today MFI works primarily with
women. Through its field staff, MFI helps them form Self Help Groups (SHGs), trains them in
good financial practice, facilitates access to microcredit loans, equips them with business skills
and facilitates access to new markets for their products.
MYRADA MYRADA is a Non Governmental Organisation managing rural development
programmes in 3 States of South India and providing on-going support including deputations of
staff to programmes in 6 other States. It also promotes the Self Help Affinity strategy in
Cambodia, Myanmar and Bangladesh
New LifeNew Life designs projects based on survey of the socioeconomic problems of the
project area and support the poor, abused and abandoned children and women by executing the
projects with a defined goals/objectives. The current projects of New Life includes orphanages
for children of incarcerated parents, Save children from Child Labour, Ensuring primary
education for the rural children in India, Early learning centres for children of vulnerable
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community groups, Read to Lead Project, Taking care of the medical needs of Physically
handicapped and Mentally retarded children.
RangDeRang Des mission is to make microcredit accessible to every low income household
by lowering loan interest rates through innovative means. Rang De is committed to enabling
individuals to become social investors through a transparent platform. While strive to improve
Rangde.org as an interface, we work extensively with our field partners to ensure that we do
not compromise on our visionmaking credit available at affordable rates.
SaadhanaSAADHANA is a non- profit organization established in the year 2001 to reach
out to the urban and rural poor women with the specific mandate to catalyze the Endeavour of
the Poor for Self-Sufficiency.
Samrudhi SAMRUDHIs mission is to empower the poor and underprivileged to become
economically self-reliant by providing cost effective and need based financial services in a
financially sustainable manner.
SHARE Micro fin Limited - (SHARE) is a regulated Non-Banking Financial Company
(NBFC) providing financial and support services to the marginalised 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.
SKS IndiaLaunched in 1998, SKS Microfinance is one of the fastest growing microfinance
organizations in the world, having provided over US $ 1.8 Billion (9,129 Crore) and has
maintained loans outstanding of US $ 605 Million (Rs.2937 Crore) in loans to 5,013,219
women members in poor regions of India. Borrowers take loans for a range of income-
generating activities, including livestock, agriculture, trade (such as vegetable vending),production (from basket weaving to pottery) and new age businesses (Beauty Parlour to
photography). SKS also offers interest-free loans for emergencies as well as life insurance to its
members. Its NGO wing SKS foundation runs the Ultra Poor Program. SKS currently has
microfinance branches in 19 states across India. SKS aims to reach members 15 million by
2012. In the last year alone, SKS Microfinance has achieved nearly 170 % growth, with 99%
on-time repayment rate.
http://rangde.org/http://www.saadhana.org/http://www.saadhana.org/http://www.samrudhi-india.org/index.htmhttp://www.samrudhi-india.org/index.htmhttp://www.sksindia.com/http://www.sksindia.com/http://www.sksindia.com/http://www.samrudhi-india.org/index.htmhttp://www.saadhana.org/http://rangde.org/8/2/2019 Final Micro Finance 2003
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UnitusUnitus, an international nonprofit organization, fights global poverty by accelerating
the growth of microfinancesmall loans and other financial tools for self-empowerment
where it is needed most.
Whole Planet Foundation Whole Planet Foundation, a private, nonprofit organization
established by Whole Foods Market, provides grants to microfinance institutions in Latin
America, Africa and Asia who in turn develop and offer microenterprise loan programs,
training and other financial services to the self-employed poor.
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OPPORTUNITIES FOR MICROFINNACING
The Government has indicated its willingness to speed up the pace of structural reforms to meet
the major challenges of
o REDUCING POVERTY:The basic motto of the government to eliminate the poverty and bring prosperity in the
country. MFI providing small loans and other credit facilities to the poor and low-income
groups; which are beginning positive changing like their standard of living group and earning
have increased
o IMPROVING SOCIAL INDICATORS:Inadequate access to productive resources and social services has resulted low social
indicators and low employment opportunities. This situation is compounded in rural areas;
where access is more difficult. So, by providing small loans and credit facilities they can
over come this issue and can improve social indicators.
o IMPROVING THE FISCAL AND BALANCE OF PAYMENTS POSITIONS:Pakistan is a poor country whose balance of payment always in deficit, because of low
productivity, lack of resources and lack of productive mens power. If MIF provide loans
new business can be established. And export of Pakistan can be improved which create
balance of payments.
o RESTORING INVESTOR CONFIEDENCE:Due to poor economy of Pakistan investors are hesitating to invest their money in
Pakistan but MFIs can boost up. Because provide loans to local people new business will
stable. Economy will go up and this situation may motivate to them for investing their
funds.
o ACHIEVING HIGHER GROWTH ON A SUSTAINABLE BASISAnother objective of MFI is that to achieve high development and bring innovation in
the economy, which improve GDP of the country and give sustained to the economy.
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SKS MICROFINANCE
About the company
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Microfinance is an effective tool that can help reduce poverty and spread economic opportunity
by giving poor people access to financial services, such as credit and insurance. SKS distributes
small loans that begin at Rs. 2,000 to Rs. 12,000 (about $44-$260) to poor women so they can
start and expand simple businesses and increase their incomes. Their micro-enterprises range
from raising cows and goats in order to sell their milk; to opening a village tea stall.SKS usesthe group lending model where poor women guarantee each others loans. Borrowers undergo
financial literacy training and must pass a test before they are allowed to take out loans.
Weekly meetings with borrowers follow a highly disciplined approach. Re-payment rates on
our collateral-free loans are more than 99% because of this systematic process. SKS also offers
micro-insurance to the poor as well as financing for other goods and services that can help them
combat poverty.
Operational Information for FY 10
Total no. of Branches - 2029
Total no. of Districts - 341
Total no. of Staff - 21,154
Total No. of Members (in '000) - 6,780
Amount Disbursed for the period (INR crores) - 7,618
Portfolio outstanding (INR crores) - 4,321
SKS APPROACH
SKS believes that access to basic financial services can significantly augment economic
opportunities for poor families and in turn help improve their lives. SKS is committed to
creating a distribution network across underserved sections of society in order to provide easy
access to the full portfolio of microfinance products and services. It also looks at using this
network to add value to the lives of its members by providing quality goods and services that
our members need at less than market rates.
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WORKING MODEL
SKS Microfinance follows the Joint Liability group Model. The methodology involves lending
to individual women, utilising five member groups where groups serve as the ultimate
guarantor for each member.
Our approach is to provide financial services at the doorstep of members in villages and urban
colonies. This allows the poor convenience and savings in terms of cost and time associated
with travelling to mainstream banks and enables SKS staff to promptly and fully collect
repayments.
Our loans are designed for convenience with small weekly repayments corresponding to cash
flows. Small first loans inculcate credit discipline and collective responsibility. Interest andloan repayments are simplified for easy comprehension.
From village selection to loan disbursal, SKS follows a clear process in its operations. Details
of our operational methodology are captured below:
Village Selection: Before starting operations, our staff conducts village surveys to evaluate
local conditions like population, poverty level, road accessibility, political stability and means
of livelihood.
Projection Meeting: After a village is selected, SKS staff introduces the community to its
mission, methodology and services.
Mini-Projection Meeting: Follow-up with interested women, and direct appeal to those who
may not have attended earlier because of religious, class, caste or gender barriers.
Group Formation: Women form self-selected five-member groups to serve as guarantors foreach other. Experience has shown that a five-member group is small enough to effectively
enforce group peer pressure and, if necessary, large enough to cover repayments in case a
member needs assistance.
Compulsory Group Training: CGT is a four-day process consisting of hour-long sessions
designed to educate clients on SKS processes and procedures and to also build a culture of
credit discipline. Using innovative visual and participatory teaching methods, SKS staff
introduces clients to our financial products and delivery methods. CGT also teaches clients the
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importance of collective responsibility, how to elect group leaders, how to affix signatures, and
a pledge that serves as a verbal contract between SKS and its members. During this training
period, SKS staff collects quantitative data on each client to ensure qualification requirements
are met, as well as to record base-line information for future analysis. On the fourth day, clients
take a Group Recognition Test conducted by a different staff member than the one whotrained them. If they pass, they are officially accepted as SKS members.
Centre Meeting: As additional groups are formed within a single village, a Centre (sangam)
emerges. During Centre Formation, groups are combined to form a centre of 3 to 10 groups or
15 to 50 members. Weekly Centre meetings serve as a time to conduct financial transactions.
Meetings are held early in the morning, so as to not interfere with clients daily activities.A
leader and deputy leader are selected to facilitate meetings and ensure compliance with SKS
procedures. In addition to financial transactions, members use the weekly meetings to discuss
new loan applications and community issues. Centre meetings are conducted with rigid
discipline in order to sustain the environment of credit discipline created during CGT.
PRODUCTS OFFERED:
Product Features Benefits
Income
Generation
Loans (IGL) -
Aarambh
Loans range from Rs. 4,000 to Rs. 10,000
for the first loan; subsequent loan amounts
determined by past credit history and
increased each in set increments up to a
maximum of Rs. 26,000
Term of the loan is 50 weeks with
principal and interest payments due on a
weekly basis
12.5% flat interest rate / 24.55% annual
effective interest rate
Provides self-employed women
financial assistance to support
their business enterprises, such as
raising livestock, running local
retail shops called kirana stores,
providing tailoring and other
assorted trades and services
Mid-Term
Loan (MTL) -
Loan amounts range from Rs. 2,000 to Rs.
14,000 in each annual cycle.
Provides self-employed women
financial assistance to support
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Vriddhi
Available any time after the completion of
20 weeks & before 40 weeks of an IGL
cycle
Term of the loan is 50 weeks with
principal and interest payments due on a
weekly basis12.5% flat interest rate /
24.55% annual effective interest rate
their business enterprises, such as
raising livestock, running local
retail shops called kirana stores,
providing tailoring and other
assorted trades and services
Emergency
Loans andAdvances -
Raksha
Interest free emergency loans range from
Rs. 500 to Rs. 2,000
Term of the loan is 20 weeks with a bullet
repayment
Interest free funeral advances of Rs. 1,000
adjusted out of the claim settlement of loan
cover insurance
Designed to meet the unforeseen
emergency requirements ofmembers
Disbursed within 24 hours of
request
Funeral advance paid to a
members family upon the death
of the member or her spouse
Life Insurance
Loans
Interest free loans of Rs. 500
Term of 25 weeks with principal repaid
weekly
Issued to members to pay their life
insurance premiums during the
initial 25 week period
Helps to promote habit of savings
and reduction of vulnerability
among members
Mobile Loans Financing of mobile phones and telephone
services
Loan amounts range from Rs. 1,500 to Rs.
3,000
26.14% annual effective interest rate and
Provides financing for mobile
phones and telephone services to
our members
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loan processing fee of 1%
Term of 25 weeks
Sangam Store
Loans
Working capital loans ranging from Rs.
1,000 to Rs. 12,500
Interest free
Term of the loan is 14 days
Provides a working capital loan to
fund the needs of our members
who own and operate kirana stores
The program allows these
members to purchase their
inventory of consumer goods and
groceries from a national
wholesaler at wholesale pricesHousing
Loans
Loans range from Rs. 50,000 to Rs.
150,000
Members must have completed at least 3
IGL cycles to qualify or one ILP to be
completed
Term of loan is 3 to 5 years with principal
and interest payments due on a monthly
basis
11.9% flat interest rate, 21% annual
effective interest rate. In addition, loan
processing fee of 2% collected upfront
Provides financial access to
women for construction of new
houses or improvement &
extension of existing houses
As Per RBI circular DNBS. 204/CGM (ASR)-2009 dated January 2, 2009, SKSs Board of
Directors has discussed and formally adopted an interest model based on cost of funds,
operational costs, and risks involved for each product.
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Product Features Benefits
Life
Insurance
Weekly payment of
Rs. 20 for the term
of five years
Upon death, we disburse to the beneficiary the full
sum assured of Rs. 5,000 plus the account value,
which is equal to the aggregate of the premiums paid
plus interest accrued, if any, less any charges for the
administration of the policy
In the event the death is deemed an accidental death,
the beneficiary receives Rs. 10,000 plus the account
value
Upon maturity in five years where no death hasoccurred, we disburse to the policyholder the account
value.
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NEW INITIATIVE
Sangam Store Loans :
The Sangam Stores project is aimed at providing working capital finance to SKS members who
own small kirana stores. With credit supplied by SKS, shopkeepers can buy consumer goodsand groceries through a dedicated third-party vendor. This relationship gives access to quality
products at competitive prices that are delivered straight to their shops. Our members save time
and transport costs normally spent on buying goods from local markets. SKS is partnering with
Metro, the German wholesaler, which supplies member kiranas from a special inventory of 250
SKUs. Under this project, SKS generates and aggregates demand from kirana store owners, in
addition to supplying credit to them. This pilot is the first step towards creating a vibrant
distribution network across sections of society currently not serviced by manufacturers.
Housing:
Many SKS members have asked for larger loans to make improvements on their homes or build
new ones. SKS has launched a housing loan pilot for members who have been with SKS for a
minimum of three years. Members can repair their houses, such as changing a thatched or
asbestos roof to RCC, or make improvements such as building a latrine or adding an extra room.
The loan has a repayment period of three to five years as per the repayment capacity of the
members. SKS is currently carrying out a pilot programme in rural markets with support from
HDFC and hopes to roll out housing loans more widely in the next financial year.
Water Purifier:
SKS has partnered with Hindustan Unilever to provide Pureit water filter devices to our
members. SKS provides the loan to make the water filter affordable and HUL provides the
distribution, installation, and servicing that ensures our members have access to clean water.
SKS is currently assessing the learning from our pilot branches and will determine a rollout
plan to reach our members pan-India in the coming months.
Solar Lamp:
Most of our members live in areas that have erratic power supply forcing business and normal
lifestyle to come to a halt with sunset. Solar-powered lighting gives our members the
opportunity to be independent from unreliable, low-voltage electricity grids or to light their
homes if theirs are currently un-electrified. After completing a successful pilot SKS is currently
evaluating the learnings from the project.
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ISSUES WITH MICROFINANCE INDUSTRY RELATED TO SKS MICROFINANCE
CASE STUDY
Andhra Pradesh, one of Indias most populous states, cracked down heavily on private
microfinance institutions (PMFIs), banning many of their activities and telling borrowers they
did not need to repay their loans. State authorities said they were prompted to take decisive
action by a spate of suicides by borrowers who were unable to pay their debts. Roughly 80
clients were reported to have taken their own lives last year an alarming figure, though tiny
relative to the 26.7 million active borrowers from PMFIs in India.
Andhra Pradesh officials charged that PMFIs, which had lent around 80 billion rupees (nearly
$2 billion) in the state, levy usurious interest rates (24-30% per year) to sustain their
promoters extravagant salaries and profits. In addition, too many borrowers had taken multiple
loans from different sources and were unable to repay them. Aggressive agents were marketing
the loans with no heed to borrowers capacity to repay. It was alleged, too, that coercion was
being used to exact repayment, leaving victims with no way out but to end their own lives.
One institution that received unwelcome attention was SKS Microfinance, once a poster child
for the PMFIs, which had done so well and grown so large that its initial public offering last
year was oversubscribed 13-fold and raised $350 million. The salaries paid to its top executives
as a reward, essentially, for lending successfully to the poorest of the poorwere excoriated
by leaders across Indias political spectrum. SKS Chairman, Vikram Akula, reportedly made
$13 million by selling some of his shares last year. Is it moral, critics asked, to profit so much
from providing services that alleviate poverty?
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ANDHRA PRADESH ORDINANCE
The Andhra Pradesh Microfinance Institutions Ordinance 2010 was issued by the Andhra
Pradesh government in the wake of a series of suicide cases in the state that were blamed upon
the MFIs who are charging high interest rates and using coercive recovery methods. It wasreported that the deaths have kicked up a furore with opposition parties and the State Human
Rights Commission demanding action from the government.
The ordinance talks about following main items:
Registration of MFIs Register of MFIs Member of SHG not to be member of more than one SHG MFIs not to seek security for loan Display of interest rates charged by MFIs Maximum amount of interest recoverable on loans discharged Prior approval for grant of further loans to SHGs or their members Duty of MFIs to maintain accounts and furnish copies Submission of monthly statements by MFIs
Power to require production of records or documents and power of entry, inspection andseizure
Complaints Settlement of disputes procedure Penalty for coercive actions by MFIs
Under the ordinance, all MFIs operating within the states have to apply for registration with the
registering authority of the district within 30 days of issue of ordinance thereby giving details
like the purpose of operating, the interest rate charged, system of conducting due diligence and
effecting recovery and the list of persons authorized for lending or recovery of money.
Registering authorities include Project Director District Rural Development Agency for the
rural areas and Project Director MEPMA (Mission for Elimination of Poverty in Municipal
Areas) for urban areas.
Microfinance institutions are further barred from granting or recovering loans without
obtaining registration under this ordinance. The registering authority can anytime cancel theregistration of an MFI after assigning sufficient reasons for such cancellation.
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The Ordinance prohibits members of SHG from holding memberships of more than one SHG.
For those who already have more than one membership, the option of retaining the membership
of one SHG and terminating membership in other SHGs is given. The member has to issue a
notice about her termination and settle the amount payable to such MFIs.
With the ordinance in place, no MFI can recover from the borrower an interest which is in
excess of the principal amount and all loans for which an MFI has realized from the borrower
an amount equal to twice the amount of the principal shall be discharged. The borrowers shall
be entitled to obtain refund form the MFI.
The ordinance also made it mandatory for MFIs to make public the rates of interest charged by
them. Moreover, MFIs are now barred from extending further loans to an SHG or to its
members which already has an outstanding loan from a Bank unless the MFIs obtain prior
approvals from the registering authority.
For putting a check on the increasing use of coercive methods by MFIs for recovering
repayments, the ordinance says that MFIs shall not deploy any agents for recovery nor shall use
any coercive action for recovering money from the borrowers. It empowers the registering
authority to suspend or cancel the license of MFIs found engaged in coercive methods.
Further, the registering authority has also been given the power to require production of records,
inspection and seizure for examination and legal actions. MFIs are also required to submit
monthly statements to the registering authority.
The ordinance also empowers SHGs and their members to file a complaint regarding violation
of the stated provisions by an MFI before the registering authority. The State government will
also be establishing fast-track courts for settlings disputes of MFIs and SHGs.
It is also reported that SHGs were expected to get further relief as the soft loans being arranged
to them from banks under debt swap scheme, to clear the MFI loans, would be charged only 3
per cent. The government would bear 10% out of the 13% interest charged by the banks on
these loans.
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MALEGAM COMMITTEE RECOMMENDATIONS
In a bid to revive the sagging prospects of the microfinance industry, Malegam committeeset
up by Reserve Bank of India has recommended earmarking a maximum interest rate of 24%
on small loans to individuals with a tagged ceiling of Rs.25000 to a single borrower.
The sub-committee has recommended creation of a separate category of NBFC, to be classified
as NBFC-MFI a lender which will provide financial services predominantly to low-income
borrowers and holds no less than 90% of its total assets in the form of qualifying assets.
Further, any bank lending to such NBFCs for the microfinance sector will be entitled to
priority lending status.
The panel provides that no less than 75% of the loans by an MFI should be for income-
generating purposes. The committee has taken a strict cognizance of the fact that a number of
individuals have taken multiple loans from various lenders of micro-credit loans. For such
cases, it has marked a cap on individuals in allowing them to borrow money from not more
than 2 MFIs.
The best part of the Malegam committee report being NBFC-MFIs should be exempted from
state Money Lending Acts. This essentially means that MFIs would be freed from the clutches
of draconian the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending)
Act, 2010, which has already reduced interest rate to 24% for the industry.
Highlights of Malegam Committee Report:
Categorizing MFIs under NBFC-MFIs Ceiling on loans to a single borrower of Rs.25000
Not more than 2 MFIs can lend to a single borrower A borrower can be a member of Self-Help Group. NBFC-MFIs to be exempted from state Money Lending Acts. BFC-MFIs to will be entitled to priority lending status.
However, the above recommendation is yet only in the public domain. It needs to be accepted
before being regularized. Some sector analysts are of the opinion that the new
recommendations might not go down too well with the smaller MFIs on account of margin
squeeze. But, overall the panel report is positive and a first step towards right direction which
soothes investor concerns with respect to the sector prospects.
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CHALLENGES FOR MICROFINANCE PROVIDERS
Although the importance of microfinance in the process of poverty eradication is realized, it
faces multiple problems. This is because offering credit to the poor is a complicated process
and the sector is still in its experimental stage.
Weve divided all problems into two sets; challenges faced by MFIs and challenges faced by
micro entrepreneurs
Microfinance Challenge 1: Perceived High Risk of Micro Entrepreneurship and Small
Businesses
Micro entrepreneurs usually have no collateral to offer to microfinance providers against loans,they usually lack an alternate source of income, and have little, if any, formal education or
training in the area of their business. As a result, commercial banks attribute a high credit risk
to micro entrepreneurs and steer clear of this sector.
Microfinance institutes (MFIs) are compelled to compensate for this risk by charging interest
rates on loans. Fortunately, the challenge can be resolved through the idea of group lending
(social collateral against loans) which ensures good repayment rates.
Microfinance Challenge 2: High Costs Involved in Small Transactions/Micro lending
The small size of micro enterprises increases the transaction cost for MFIs because they cannot
process loans in bulk (unless good management information systems are in place). This denies
MFIs the benefit of economies of scale; hence, they are forced to cover their costs through high
interest rates on loans (read 4 ways to control high interest rates).
According to a study conducted by Asian Development Bank, microfinance providers in the
Asia-Pacific region charge interest rates on micro-sized loans ranging from 30 to 70% a year,
which is much higher than rates offered by commercial banks (Fernando, 2006). However,
there are instances where the interest rates charged were too low for the MFIs sustainability.
There is, however, possible solutions to this problem by improving the technology model
used by microfinance institutes, their operational costs can be significantly lowered and
efficiencies may be gained during automated loan processing.
http://microfinance.cgap.org/2010/06/17/the-other-side-of-the-interest-rate-argument/trackback/http://microfinancehub.com/2010/02/02/microfinance-technology-model-and-case-study/http://microfinancehub.com/2010/02/02/microfinance-technology-model-and-case-study/http://microfinancehub.com/2010/02/02/microfinance-technology-model-and-case-study/http://microfinancehub.com/2010/02/02/microfinance-technology-model-and-case-study/http://microfinance.cgap.org/2010/06/17/the-other-side-of-the-interest-rate-argument/trackback/8/2/2019 Final Micro Finance 2003
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Microfinance Challenge 3: Lack of Debt and Equity Funds for MFIs to Pass on to the
Poor
Capital availability for microfinance is hardly a problem owing to the rapid growth in the
microfinance sector, which has been fuelled by attention from the media and development
agencies. Even though there are plenty of financing options available for MFIs, there is an
emerging shortage of money because of the current financial crisis across the globe. Another
reason for this shortfall is the lack of awareness of funding sources by MFI managers.
Microfinance Challenge 4: Difficulty in Measuring the Social Performance of MFIs
Microfinance is delivering the economic returns its proponents promised, but there are only a
handful oftools available that measure the social return of loan programs for the poor. To addto the problem, the tools use proxies to estimate the amount of poverty and social change
surrounding micro entrepreneurs. This makes the gathering of funds a challenge because
donors may question the actual impact made my microfinance.
Microfinance Challenge 5: Mixing Charity with Business
Since credit without strict discipline is nothing but charity (Professor Yunus), if microfinance
providers fail to protect themselves against loan delinquency, the