A STUDY ON MICROFINANCE

A PROJECT REPORT ON
Submitted by MANPREET KAUR MBA 2nd semester UNI ROLL NO. 1174126

In the partial fulfillment for the award of the degree of MASTERS IN BUSINESS ADMINISTRATION

INSTITUTE OF MANAGEMENT STUDIES, BHADDAL

PUNJAB TECHNICAL UNIVERSITY, JALANDHAR

DECLARATION
I am sincerely thankful to all those people who have been giving me any kind of assistance in the making of this project report. I express my gratitude to Ms MANPREET KAUR, who has through her vast experience and knowledge has been able to guide me, both ably and successfully towards the completion of the project. I express my gratitude, IMSBHADDAL. I would hereby, make most of the opportunity by expressing my sincerest thanks to all my faculties whose teachings gave me conceptual understanding and clarity of comprehension, which ultimately made my job more easy. Credit also goes to all my friends whose encouragement kept me in good stead. Their continuous support has given me the strength and confidence to complete the project without any difficulty.

ACKNOWLEDGEMENT
I gratefully acknowledgement the guidance and encouragement given to me by Ms MANPREET KAUR whose invaluable suggestions and constructive criticism helped me to enhance the project work. She deserves a special compliment for her guidance. I thank my institute who provided me this opportunity to undergo this project in a particular field.

Manpreet kaur MBA 2nd semester Uni. Roll no- 1174126

LIST OF TABLES
S.NO
1

TABLE NO.
Product & services of Microfinance

PAGE NO
21

Distribution of Indebted Rural Households: Agency wise

28-29

Legal Forms of MFIs in India

36

Comparative Analysis of Micro-finance Services offered to the poor

49

LIST OF FIGRUES
S.NO
1 2

FIG. NO
Development process through microfinance Micro finance interventions through different organizations

PAGE NO.
23 24

TABLE OF CONTENTS
S.NO
1

TITLE NAME
CHAPTER NO.1 Introduction The History of Modern Microfinance Who are the clients of micro finance? Principles of micro finance Role of Microfinance Difference between micro credit and microfinance Financial needs and Financial services Activities in Microfinance Governments

PAGE NO
9-29

role supporting microfinance Microfinance changing the face of poor India Microfinance Social Aspects 2 CHAPTER NO.2 Objectives of microfinance 3 4 CHAPTER NO.3 Research methodology CHAPTER NO.4 Data analysis and interpretation Legal forms of MFIs in India Microfinance Providers Service Company Model Microfinance Strategic Strategic Policy Initiatives 34-66 32-33 30-31

 Microfinance Management Microfinance Working Environment SWOT MATRIX Role, Functions and Working Mechanism of Financial Institutions Marketing of Microfinance Products 5 CHAPTER NO.5 Recommendations, suggestions and conclusion 67-77 6 CHAPTER NO. 6 Bibliography 78-79

CHAPTER NO. 1 INTRODUCTION

Microfinance is a general term to describe financial services to low-income individuals or to those who do not have access to typical banking services. Microfinance is also the idea that low-income individuals are capable of lifting themselves out of poverty if given access to financial services. While some studies indicate that microfinance can play a role in the battle against poverty, it is also recognized that is not always the appropriate method, and that it should never be seen as the only tool for ending poverty. 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 of creating 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 endeavored 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 have partnered 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
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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. Microfinance refers to small scale financial services for both credits and deposits-that are provided to people who farm or fish or herd; operate small or micro enterprise where goods are produced, recycled, repaired, or traded; provide services; work for wages or commissions; gain income from renting out small amounts of land, vehicles, draft animals, or machinery and tools; and to other individuals and local groups in developing countries in both rural and urban areas.

Microfinance Definition
According to International Labor 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. Micro Finance is
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buzzing word, used when financing for micro entrepreneurs. Concept of micro finance is emerged in need of meeting special goal to empower under-privileged class of society, women, and poor, downtrodden by natural reasons or men made; caste, creed, religion or otherwise. The principles of Micro Finance 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 for themselves and their children. Traditionally micro finance was focused on providing a very standardized credit product. The poor, just like anyone else, (in fact need like thirst) 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 micro finance our current challenge is to find efficient and reliable ways of providing a richer menu of micro finance products. Micro Finance is not merely extending credit, but extending credit to those who require most for their and familys survival. It cannot be measured in term of quantity, but due weight age to quality measurement. How credit availed is used to survive and grow with limited means.

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The History of Modern Microfinance

In the late 1970s the concept of microfinance had evolved. Although, microfinance have a long history from the beginning of the 20th century we will concentrate mainly on the period after 1960. Many credit groups have been operating in many countries for several years, for example, the "chit funds" (India), tontines" (West Africa), "susus" (Ghana), "pasanaku" (Bolivia) etc. Besides, many formal saving and credit institutions have been working for a long time throughout the world. During the early and mid 1990s various credit institutions had been formed in Europe by some organized poor people from both the rural and urban areas. These institutions were named Credit Unions, People's Bank etc. The main aim of these institutions was to provide easy access to credit to the poor people who were neglected by the big financial institutions and banks. In the early 1970s, few experimental programs had started in Bangladesh, Brazil and some other countries. The poor people had been given some small loans to invest in micro-business. This kind of micro credit was given on the basis of solidarity group lending, that is, each and every member of that group guaranteed the repayment of the loan of all the members. Many banks and financial institutions have been pioneering the microfinance program after 1970. These are listed below:

ACCION International
This institution had been established by a law student of Latin America to help the poor people residing in the rural and urban areas of the Latin American countries. It is one of the most important microfinance institutions
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of the world. Its network of lending partner comprises not only Latin America but also US and Africa.

SEWA Bank
In 1973, the Self Employed Women's Association (SEWA) of Gujarat (in India) formed a bank, named as Mahila SEWA Cooperative Bank, to access certain financial services easily. Almost 4 thousand women contributed their share capital to form the bank. Today the number of the SEWA Bank's active client is more than 30,000.

GRAMEEN Bank
Credit unions and lending cooperatives have been around hundreds of years. However, the pioneering of modern microfinance is often credited to Dr. Mohammad Yunus, who began experimenting with lending to poor women in the village of Jobra, Bangladesh during his tenure as a professor of economics at Chittagong University in the 1970s. He would go on to found Grameen Bank in 1983 and win the Nobel Peace Price in 2006. Since then, innovation in microfinance has continued and providers of financial services to the poor continue to evolve. Today, the World Bank estimates that about 160 million people in developing countries are served by microfinance. Grameen Bank (Bangladesh) was formed by the Nobel Peace Prize (2006) winner Dr Muhammad Younus in 1983. This bank is now serving almost 400,0000 poor people of Bangladesh. Not only that, but also the success of Grameen Bank has stimulated the formation of other several microfinance institutions like, ASA, BRAC and PROSHIKA.

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Who are the clients of micro finance?

The typical micro finance clients are low-income persons that do not have access to formal financial institutions. Micro finance clients are typically self-employed, often household-based entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in small incomegenerating activities such as food processing and petty trade. In urban areas, micro finance activities are more diverse and include shopkeepers, service providers, artisans, street vendors, etc. Micro finance 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 micro finance. As we broaden the notion of the types of services micro finance encompasses, the potential market of micro finance 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 consumed over several months by the requirements of
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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.

Principles of micro finance

Poor people need not just loans but also savings, insurance and money transfer services. Microfinance must be useful to poor households: helping them raise income, build up assets and/or cushion themselves against external shocks. Microfinance can pay for itself. Subsidies from donors and government are scarce and 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. 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 from covering their costs, which chokes off the supply of credit. Microfinance institutions should measure and disclose their performance both financially and socially.
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Role of Microfinance
The micro credit of microfinance prename 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: 1. Microfinance helps poor households meet basic needs and protects them against risks. 2. The use of financial services by low-income households leads to improvements in household economic welfare and enterprise stability and growth. 3. By supporting womens economic participation, microfinance empowers women, thereby promoting gender equity and improving household well being. 4. The level of impact relates to the length of time clients have had access to financial services.

Difference between micro credit and microfinance

Micro credit refers to very small loans for unsalaried borrowers with little or no collateral, provided by legally registered institutions. Currently, consumer credit provided to salaried workers based on automated credit Scoring is usually not included in the definition of micro credit, although this may change. Microfinance typically refers to micro credit, savings, insurance, money transfers, and other financial products targeted at poor and low-income people.

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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 book The 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 or death. Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of dwellings. Investment Opportunities: expanding a business, buying land or equipment, improving housing, 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 noncash 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 objective is to satisfy

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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.

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

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Activities in Microfinance
Micro credit
It is a small amount of money loaned to a client by a bank or other institution. Micro credit 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, usually across 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.

Product Design
The starting point is: how do MFIs decide what product s to offer? The actual loan products need to be designed according to the demand of the target market. Besides the important question of what risks to cover,
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organizations also have to decide whether they want to bundle many different benefits into one basket policy, or whether it is more appropriate to keep the product simple. For marketing purposes, MFIs sometimes prefer the basket cover, since it can make the policies sound comprehensive, but is that the right approach for the low-income market? After picking products, one must also understand how they are priced. What assumptions do the organizations make with regard to operating costs, risk premiums, and reinsurance?
Table no.1 Product & services of Microfinance

Financial Services

Other Financial Services

Non Financial Services

Family Health and Sanitation Education, Financial Education, Micro-entrepreneur Training.

1. Credit Services Small Credit, Small Business Credit. 2. Deposit Services Voluntary Savings Services, Mandatory Savings.

Micro-insurance, Life Insurance, Health Insurance, Loan for Housing, Education, Health.

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Governments role supporting microfinance

Governments most important role is not provision of retail credit services, for reasons mentioned in Government can contribute most effectively by: Setting sound macroeconomic policy that provides stability and low inflation. Avoiding interest rate ceilings - when governments set interest rate limits, political factors usually result in limits that are too low to permit sustainable delivery of credit that involves high administrative costssuch as tiny loans for poor people. Such ceilings often have the announced intention of protecting the poor, but are more likely to choke off the supply of credit. Adjusting bank regulation to facilitate deposit taking by solid MFIs, once the country has experience with sustainable microfinance delivery. Creating government wholesale funds to support retail MFIs if funds can be insulated from politics, and they can hire and protect strong technical management and avoid disbursement pressure that force fund to support unpromising MFIs. Promote microfinance as a key vehicle in tackling poverty, and as vital part of the financial system. Create policies, regulations and legal structures that encourage responsive, sustainable microfinance. Encourage a range of regulated and unregulated institutions that meet performance standards. Encourage competition, capacity building and innovation to lower costs and interest rates in microfinance.
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Fig no.1

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Fig no.2

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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 and engaged in agricultural work on a seasonal basis, and manual laborers in forestry, mining, household industries, construction and transport. This segment requires, first and foremost,
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consumption credit during those months when they do not get labor 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, weavers and those self-employed in the urban informal sector as hawkers, vendors, and workers in household microenterprises. 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 pump sets, bore wells and livestock in case of farmers, and equipment (looms, machinery) and work sheds in case of nonfarm workers. The third market segment is of small and medium farmers who have gone in for commercial 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.

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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 the desirability 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/C focus 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. Savings services help poor people: Savings has been called the forgotten half of microfinance. Most poor people now use informal mechanisms to save because they lack access to good formal deposit services. They may tuck cash under the mattress; buy
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animals or jewelry that can be sold off later, or stockpile inventory or building materials. These savings methods tend to be riskycash can be stolen, animals can get sick, and neighbors can run off. Often they are illiquid as well one cannot sell just the cows leg when one needs a small amount of cash. Poor people want secure, convenient deposit services that allow for small balances and easy access to funds. MFIs that offer good savings services usually attract far more savers than borrowers.

Womens indicators of empowerment through microfinance:

Ability to save and access loans Opportunity to undertake an economic activity Mobility-Opportunity to visit nearby towns Awareness- local issues, MFI procedures, banking transactions Skills for income generation Decision making within the household

Group mobilization in support of individual clients- action on.

Table no.2 Distribution of Indebted Rural Households: Agency wise

Credit Agency Government Cooperative societies Commercial banks insurance Provident fund Other institutional sources All institutional agencies

Percentage of rural households 6.1 21.6 33.7 0.3 0.7 1.6 64.0

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landlords Agricultural money lenders Professional money lenders Relatives and friends others All non institutional agencies All non agencies

4.0 7.0 10.5 5.5 9.0 36.0 100.0

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CHAPTER NO.2 OBJECTIVES OF MICRO FINANCE

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 To protect the interest of the depositors. How microfinance put in place prudential norms, standards and practices. To provide sufficient information about the true risks faced by the banks/MFIs. Promoters systemic stability and thereby sustains public confidence in the banks/MFIs. Prevents a banks/MFIs failure/potential dangers through timely interventions. To penalize the violations, misconducts, non-compliance to the norms of behavior. To provides invaluable advisory inputs for problem-solving and overall improvement of the banks/MFIs. Promoters safe, strong and sound banking/MF system and effective banking/MF policy and Promotes and enhances orderly economic growth and development.

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CHAPTER NO.3 RESEARCH METHODOLOGY

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The research methodology I will be using would be descriptive research design. It means the topic would be described as far as possible.

Definition
Descriptive research means to describe something such as market characteristics or functions. The data I would be using secondary data. The data is already listed and I would be properly arranging it as per my research topic. I will be listing the following topics: Proper descriptions of suggestions Relevant and adequate data analysis Data analysis method would be appropriate. Reliability and validity of the data would be checked

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CHAPTER NO.4 DATA ANALYSIS AND INTERPRETATION

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Legal forms of MFIs in India

MFIs and Legal Forms
With the current phase of expansion of the SHG Bank linkage programmed and other MF initiatives in the country, the informal micro finance sector in India is now beginning to evolve. While there is no published data on private MFIs operating in the country, the number of MFIs is estimated to be around 800. However, not more than 10 MFIs are reported to have an outreach of 100,000 micro finance clients. An overwhelming majority of MFIs are operating on a smaller scale with clients ranging Between 500 to 1500 per MFI. The geographical distribution of MFIs is very much lopsided with concentration in the southern India where the rural branch network of formal banks is excellent. It is estimated that the share of MFIs in the total micro credit portfolio of formal & informal institutions is about 8 per cent. Not for profit MFIs governed by societies registration act, 1860 or Indian trusts act 1882 Non profit companies governed by section 25 of the companies act, 1956 For profit MFIs regulated by Indian companies act, 1956 NBFC governed by RBI act, 1934. Cooperative societies by cooperative societies act enacted by state government.

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Table no.3 Legal Forms of MFIs in India

Types of MFIs

Estimated Number

Legal Acts under which Registered

1. Not for Profit MFIs a.) NGO - MFIs b.) Non-profit Companies

400 to 500 10

Societies Registration Act, 1860 or similar Provincial Acts

Indian Trust Act, 1882 2. Mutual Benefit MFIs a.) Mutually Aided Cooperative Societies (MACS) and similarly set up institutions 3. For Profit MFIs a.) Non-Banking Financial Companies (NBFCs) Total 700 - 800 6 Indian Companies Act, 1956 Reserve Bank of India Act, 1934 200 to 250 Section 25 of the Companies Act, 1956 Mutually Aided Cooperative Societies Act enacted by State Government

Microfinance Providers
Microfinance Institutions A microfinance institution (MFI) is an organization that provides microfinance services. MFIs range from small non-profit organizations to large commercial banks. Most MFIs started as not for- profit organizations like NGOs (non-governmental organizations), credit unions and other financial cooperatives, and state owned development and postal savings banks. An increasing number of MFIs are now organized as for-profit
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entities, often because it is a requirement to obtaining a license from banking authorities to offer savings services. For-profit MFIs may be organized as Non-Banking Financial Companies (NBFCs), commercial banks that specialize in microfinance, or microfinance departments of fullservice banks. The micro finance service providers include apex institutions like National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), and, Rashtriya Mahila Kosh (RMK). At the retail level, Commercial Banks, Regional Rural Banks, and, Cooperative banks provide micro finance services. Today, there are about 60,000 retail credit outlets of the formal banking sector in the rural areas comprising 12,000 branches of district level cooperative banks, over 14,000 branches of the Regional Rural Banks (RRBs) and over 30,000 rural and semi-urban branches of commercial banks besides almost 90,000 cooperatives credit societies at the village level. On an average, there is at least one retail credit outlet for about 5,000 rural people. This physical reaching out to the far-flung areas of the country to provide savings, credit and other banking services to the rural society is an unparalleled achievement of the Indian banking system. In the this paper an attempt is made to deal with various aspects relating to emergence of private micro finance industry in the context of prevailing legal and regulatory environment for private sector rural and micro finance operators. 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
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have been providing funds to MFIs for on lending to poor clients. Though initially, only a handful of NGOs were into 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. MFIs are an extremely heterogeneous group comprising NBFCs, societies, trusts and cooperatives. . For NGOs: 1. The field of development itself expands and shifts emphasis with the pull of ideas, and NGOs perhaps more readily adopt new ideas, especially if the resources required are small, entry and exit are easy, tasks are (perceived to be) simple and peoples acceptance is high all characteristics (real or presumed) of microfinance. 2. Canvassing by various factors, including the National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), Friends of Womens World Banking (FWWB), Rashtriya Mahila Kosh (RMK), Council for Advancement of Peoples Action and Rural Technologies (CAPART), Rashtriya Gramin Vikas Nidhi (RGVN), various donor funded programmes especially by the International Fund for Agricultural Development (IFAD), United Nations Development Programme (UNDP), World Bank and Department for International Development, UK (DFID)], and lately commercial banks, has Greatly added to the idea pull. Induced by the worldwide focus on microfinance, donor NGOs too have been funding microfinance projects. One might call it the supply push.
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3. All kinds of things from khadi spinning to Nadep compost to balwadis do not produce such concrete results and sustained interest among beneficiaries as microfinance. Most NGO-led microfinance is with poor women, for whom access to small loans to meet dire emergencies is a valued outcome. Thus, quick and high customer satisfaction is the USP that has attracted NGOs to this trade. 4. The idea appears simple to implement. The most common route followed by NGOs is promotion of SHGs. It is implicitly assumed that no technical skill is involved. Besides, external resources are not needed as SHGs begin with their own savings. Those NGOs that have access to revolving funds from donors do not have to worry about financial performance any way. The chickens will eventually come home to roost but in the first flush, it seems all so easy. 5. For many NGOs the idea of organizing forming a samuha has inherent appeal. Groups connote empowerment and organizing women is a double bonus. 6. Finally, to many NGOs, microfinance is a way to financial sustainability. Especially for the medium-to-large NGOs that are able to access bulk funds for on-lending, for example from SIDBI, the interest rate spread could be an attractive source of revenue than an uncertain, highly competitive and increasingly difficult-to-raise donor funding.

Service Company Model

In this context, the Service Company Model developed by ACCION and used in some of the Latin American Countries is interesting. The model may hold significant interest for state owned banks and private banks with
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large branch networks. Under 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.

Coordinating Microfinance Efforts in India

NABARD coordinates the microfinance activities in India at international/ national/ state / district levels. These include organizing international/national Workshops, Seminars, etc for experience sharing, Organizing National and State level Meets of Bankers and NGOs etc .Dissemination of best practices in SHG / microfinance.

Other Initiatives
Micro enterprise Development Programmer (MEDP) for Matured SHGs The progression of SHG members to take up micro enterprise involves intensive training and hand holding on various aspects including understanding market, potential mapping and ultimately fine tuning skills and entrepreneurship to manage the enterprise. Hence, a separate, specific and focused skill-building programme Micro Enterprise Development Programmed (MEDP) has been formulated. This involves organizing short duration, location specific programmers on skill up gradation / development for setting up sustainable micro-enterprises by matured SHG members. The duration of training programme can vary between 3 to 13 days, depending upon the objective and nature of training. The training may be conducted by agencies that have background and professional competency in the field of micro enterprise Development with an expertise in skill development.
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 Scheme for Capital/ Equity Support to Micro-Finance Institutions (MFIs) from MFDEF
The scheme attempts to provide capital/equity support to Micro Finance Institutions (MFIs) so as to enable them to leverage capital/equity for accessing commercial and other funds from banks, for providing financial services at an affordable cost to the poor, and to enable MFIs to achieve sustainability in their credit operations over a period of 3-5 years.

Scheme for financial assistance to banks/ MFIs for rating of Micro Finance Institutions (MFIs)
In order to identify MFIs, classify and rate such institutions and empower them to intermediate between the lending banks and the clients, NABARD has decided to extend financial assistance to Commercial Banks and Regional Rural Banks by way of grant. The banks can avail the services of credit rating agencies, M-CRIL, ICRA, CARE and Planet Finance in addition to CRISIL for rating of MFIs. The financial assistance by way of grant for meeting the cost of rating of MFIs would be met by NABARD to the extent of 100% of the total professional fees subject to a maximum of Rs.3,00,000/-. The remaining cost would be borne by the concerned MFI. The cost of local hospitality (including boarding and lodging) towards field visit of the team from the credit rating Agency, as a part of the rating exercise, would also be borne by the MFI. Those MFIs which have a minimum loan outstanding of more than Rs. 50.00 lakh (Rupees fifty
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lakh only) and maximum of Rs 10 crore (Rupees Ten crore only) would be considered for rating and support under the scheme. Financial assistance by way of grant would be available only for the first rating of the MFI. MFIs availing Capital Support and/or Revolving Fund Assistance from NABARD are also eligible for reimbursement of 50% of the cost of professional fee charged by Credit Rating Agency for second rating subject to a maximum of Rs.1.50 lakh (i.e 50% of Rs.3 lakh). This will be in addition to the re-imbursement of professional fee for first rating of the MFI. Refinance support to banks for financing MFIs The scheme is to provide 100% refinance to banks for financing MFIs. Interest rate on refinance to Commercial Banks and Regional Rural Banks on their loans to MFIs for on lending to clients will be at 3% less than that charged by banks subject to minimum interest rate of 7.5% for all regions and all eligible purposes. The revised rate of interest is applicable to refinance disbursed on or after 01 March 2010.

. Microfinance Strategic Strategic Management:

Strategic management is a field that deals with the major intended and emergent initiatives taken by general manager on behalf of owners, involving utilization of resources, to enhance the performance of rams in their external environments. It entails.

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 Understanding microfinance strategies This report explores strategic issues shaping the future of the MFI sector in India. The study approached CEOs of select MFIs with a set of issues ranging from concerns to competition and sought their opinions about future strategies. The report draws from their responses, and states that: 1. Future strategy is about being strong on processes and being overtly client-centric; 2. Success is a prudential combination of three factors, namely, culture, beliefs and aspirations; 3. Culture is about the degree of trust rather than the rate of interest; 4. Risk management systems of economically weaker families are built on their beliefs about dependability and access; 5. Micro credit stories have revealed ingenious ways that clients have used their loans for purposes that satisfied their aspirations. Finally, the sector, at about Rs. 14,000 crore looks large, but is small by any business scale. Competition and unhealthy practices are overshadowing the good work and reputation earned over many years. MFIs in India need to overcome these challenges in the future.

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.Microfinance Development and Equity Fund, NABARD, 2005.Working group on Financing NBFCs by Banks- RBI.
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 SHG-Bank Linkage Programmer

A Facilitating SHGs to access credit from formal banking channels. SHG-Bank Linkage Programmer has proved to be the major supplementary credit delivery system with wide acceptance by banks, NGOs and various government departments.

Capacity Building
Capacity building must be tailored to meet the differing needs of the nascent/emerging MFIs and of the expanding/mature MFIs. There is a pressing need to develop comprehensive, relevant and integrated training modules on a wide range of topics to professionalize Indian microfinance thus building the much sought-after second tier management in MFIs. The industry continues to grow, and so does the demand for competent middle management. Currently, these are typically sourced by MFIs from the rural institutes of management. But these rural institutes are using curricula largely based on the one developed by SIDBI nearly a decade ago and it is high time to revisit this curriculum, to update it both in terms of content (to reflect the new realities in India microfinance) and in terms of its delivery (to use multi-media/practical examples, and thus bring the courses to life with video clips, case studies and field-based exercises that take the students out into the field).

Microfinance Management: Objectives

The programmer aims at enabling the participants to gain a clear understanding of various policies, conceptual, and operational issues
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involved in developing effective and successful microfinance interventions.

Innovative Methodologies
Tiny amount of loan to large number of borrowers at their doorstep is a costly operation compared to revenue income. Cost reduction is also an essential element in microfinance operation. Reducing cost can be possible either offering larger loan size or by innovating no conventional Management which is less costly.

The essences of innovative management are as follows:

1. Specialized operation. 2. Documentation of essential information only. 3. Simple product, simple loan application and verification process. 4. Absence of grant guarantee. 5. Staff recruitment in no conventional manner. 6. On the job training (each one teaches one). 7. Simple standard loan register along with ledger and cash book abandoning the bookkeeper/cashier. 8. Standard furniture, fixture and collective use of facilities in the office. 9. Decentralized branch structure. 10. Branch level financial planning 11. Strong monitoring from mid and head office. 12. Written Manual.

Microfinance Working Environment

How can microfinance institutions (MFIs) help improve working conditions? How can they contribute to job creation? And how can MFIs help reduce

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child labor? Should MFIs have an interest in addressing these and other decent work issues? These are some of the questions that the ILO intends to address through an experimental global action research programmer (2008-2011) in partnership with microfinance Institutions interested in promoting decent work. Access to micro credit or other financial services can help improve the decent work status. Conditional loans, credit with education, incentives like interest rate rebates, linkages with social partners and NGOs as well as the provision of micro insurance, Conditional cash transfers or health care can be effective ways to reduce child labor, decrease vulnerabilities, raise awareness and create incentives to improve working conditions.

Current Challenging Issues

1. Capacity Building: The long-term future of the micro-finance sector

depends on MFIs being able to achieve operational, financial and institutional sustainability.

2. Innovation: Tiny amount of loan to large number of borrowers at their

doorstep is a costly operation compared to revenue income. Cost reduction is also an essential element in microfinance operation. Reducing cost can be possible either offering larger loan size or by innovating no conventional Management which is less costly.

3. Funding: A substantial outreach is a guarantee of efficiency that can

play a large part in leveraging funds.

4. Outreach: A substantial outreach is a guarantee of efficiency that can

play a large part in leveraging funds.

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SWOT MATRIX for Microfinance Management

STRENGTHS
1. Experienced senior management Team. 2. Robust IT system. 3. Clear and well defined HR policy. 4. Infusion of own equity - commitment from promoters. 5. Process innovation. 6. Clarity and good understanding of vision. 7. Transparency at all levels. 8. Plans for value added and livelihood support services (LDS). 9. Shared ownership.

WEAKNESSES
1. Limited resources. 2. Micro managing. 3. Start up organization; therefore, yet to institutionalize the standard processes. 4. Attracting/Holding on to the staff till the time we become established players. 5. Refine the processes for growth.

OPPORTUNITIES
1. Huge Potential Market. 2. Scope of introducing livelihood related services. 3. Financial crunch is helping organization to be cost conscious and effective.
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4. IT systems.

THREATS
1. Financial crisis. 2. Increasing competition. 3. Increasing competition. 4. Poor banking infrastructure. 5. Political instability.

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Table no.4

Comparative Analysis of Micro-finance Services offered to the poor

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Role, Functions and Working Mechanism of Financial Institutions

1. ICICI Bank
ICICI Bank is one bank that has developed a very clear strategy to expand the provision of financial products and services to the poor in India as a profitable activity
ICICIs microfinance portfolio has been increasing at an impressive speed. From 10,000 microfinance clients in 2001, ICICI Bank is now lending to 1.8 million clients through its partner microfinance institutions, and its outstanding portfolio has increased from Rs. 0.20 billion (US$4.5 million) to Rs. 9.98 billion (US$227 million). A few years ago, these clients had never been served by a formal lending institution. There is an increasing shift in the microfinance sector from grant-giving to investment in the form of debt or equity, and ICICI believes grant money should be limited to the creation of facilitative infrastructure. ICICI Bank launches new initiative in micro-finance ICICI Bank has taken a stake of under 20 per cent in Financial Information Network and Operations Private Ltd (FINO), which was launched on Thursday, July 13, 2001. FINO would provide technological solutions as well as services to finance providers to reach the, underserved in the country. ICICI Bank is the lead facilitator. According to Mr Nachiket Mor, Deputy Managing Director, ICICI Bank, FINO is an independent entity. "We would reduce our stake in the company when required," he said.
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33 ICICI Bank expects to target 200 micro-finance institutions (MFIs) by March 2007, he said, speaking on the sidelines of the press conference to launch FINO. At present, the bank has tie-ups with 100 MFIs. FINO is an initiative in the micro-finance sector. It would target 300-400 million people who do not have access to basic financial services, said Mr Manish Khera, CEO, FINO. The company has an authorised capital of Rs 50 crore. MFIs, NBFCs, RRBs, co-operative banks, etc would directly or indirectly tie up with FINO to use its services, he said. FINO would charge Rs 25-30 per account every year.

Core banking products

FINO has partnered with IBM and i-flex to offer core banking products. It would also provide credit bureau services, which includes individual customer credit rating and analytics based on transaction history. It also launched biometric cards for customers, which would be a proof of identity and give collateral to them. The card would also offer multiple products including savings, loans, insurance, recurring deposits, fixed deposits and remittances. The company would also build-up customer database, thus bringing them into mainstream banking. "There was a need for automated structured data system like FINO," said Mr Mor. "Essential pieces of infrastructure are missing in India. We lack credit-tracking mechanism; therefore there was a need for an intervention like FINO." The company expects to reach 25 million customers in five years and two million customers by the end of 2007.

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FINO aims bringing scale to "micro" business leading to lowering of costs for the local financial institutions (LFIs) and act as an internal technology department for the LFIs, said Mr Khera. The company is working on providing technological solutions in insurance, especially the health insurance sector to the under-privileged," he said. It is interacting with Nabard, SIDBI and other banks to give shape to what FINO does, said Mr Khera.

ICICI Bank's thrust on micro-finance

ICICI Bank has entered into partnerships with various microfinance institutions (MFI) and non-Government organizations (NGOs) to scale up its micro lending business. Addressing presspersons here, today, Nachiket Mor, Executive Director, ICICI Bank, said, the partnership model would provide assured source of funding to NGOs and MFIs. The bank had extended advances to the tune of Rs. 150 crores as on February 29, this year, under this scheme, Mr. Mor said. The bank had acquired a network of self-help groups (SHGs) developed by the erstwhile Bank of Madura after its merger with ICICI Bank. Since then the SHG programme had grown substantially and 10,175 groups had been promoted reaching out to 2.03 lakh women spread across 2,398 villages, the Executive Director said. One of the micro finance institutions, `Microcredit Foundation of India', established by K. M. Thiagarajan, former Chairman of Bank of Madura in 2002, had initiated a programme for microcredit through self-help groups. ICICI Bank has entered into a memorandum of understanding with Microcredit Foundation to outsource SHG development, maintenance of groups, credit linkage and recovery of loans.
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 The MFI as Collection Agent

To address these constraints, ICICI Bank initiated a partnership model in 2002 in which the MFI acts as a collection agent instead of a financial intermediary. This model is unique in that it combines debt as mezzanine finance to the MFI (Mezzanine finance combines debt and equity financing: it is debt that can be converted by the lender into equity in the event of a default. This source of financing is advantageous for MFIs because it is treated like equity in the balance sheet and enables it to raise money without additional equity, which is an expensive financing source.).The loans are contracted directly between the bank and the borrower, so that the risk for the MFI is separated from the risk inherent in the portfolio. This model is therefore likely to have very high leveraging capacity, as the MFI has an assured source of funds for expanding and deepening credit. ICICI chose this model because it expands the retail operations of the bank by leveraging comparative advantages of MFIs, while avoiding costs associated with entering the market directly.

Securitization
Another way to enter into partnership with MFIs is to securitize microfinance portfolios. In 2004, the largest ever securitization deal in microfinance was signed between ICICI Bank and SHARE Microfinance Ltd, a large MFI operating in rural areas of the state of Andhra Pradesh. Technical assistance and the collateral deposit of US$325,000 (93% of the guarantee required by ICICI) were supplied by Grameen Foundation USA. Under this agreement, ICICI
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purchased a part of SHAREs microfinance portfolio against a consideration calculated by computing the Net Present Value of receivables amounting to Rs. 215 million (US$4.9 million) at an agreed discount rate. The interest paid by SHARE is almost 4% less than the rate paid in commercial loans. Partial credit provision was provided by SHARE in the form of a guarantee amounting to 8% of the receivables under the portfolio, by way of a lien on fixed deposit. This deal frees up equity capital, allowing SHARE to scale up its lending. On the other hand, it allows ICICI Bank to reach new markets. And by trading this high quality asset in capital markets, the bank can hedge its own risks.

Beyond Microcredit
Microfinance does not only mean microcredit, and ICICI does not limit itself to lending. ICICIs Social Initiative Group, along with the World Bank and ICICI Lombard, the insurance company set up by ICICI and Canada Lombard, have developed Indias first index-based insurance product. This insurance policy compensates the insured against the likelihood of diminished agricultural output/yield resulting from a shortfall in the anticipated normal rainfall within the district, subject to a maximum of the sum insured. The insurance policy is linked to a rainfall index.

Technology
One of the main challenges to the growth of the microfinance sector is accessibility. The Indian context, in which 70% of the population lives in rural areas, requires new, inventive channels of delivery. The use
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of technologies such as kiosks and smart cards will considerably reduce transaction costs while improving access. The ICICI Bank technology team is developing a series of innovative products that can help reduce transaction costs considerably. For example, it is piloting the usage of smart cards with Sewa Bank in Ahmedabad. To maximize the benefits of these innovations, the development of a high quality shared banking technology platform which can be used by MFIs as well as by cooperatives banks and regional rural banks is needed. ICICI is strongly encouraging such an effort to take place. Wipro and Infosys, I-Flex, 3iInfotech, some of the best Indian information technology companies specialized in financial services, and others, are in the process of developing exactly such a platform. At a recent technology workshop at the Institute for Financial Management Research in Chennai, the ICICI Bank Alternate Channels Team presented the benefits of investing in a common technology platform similar to those used in mainstream banking to some of the most promising MFIs.

The Centre for Microfinance Research

ICICI bank has created the Centre for Microfinance Research (CMFR) at the Institute for Financial Management Research (IFMR) in Chennai. Through research, research-based advocacy, high level training and strategy building, it aims to systematically establish the links between increased access to financial services and the participation of poor people in the larger economy. The CMFR Research Unit supports initiatives aimed at understanding and analyzing the following issues: impact of access to financial services;
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contract and product designs; constraints to household productivity; combination of microfinance and other development interventions; evidence of credit constraints; costs and profitability of microfinance organizations; impact of MFI policies and strategies; peoples behavior and psychology with respect to financial services; economics of micro-enterprises; and the effect of regulations. Finally, the CMFR recognizes that while MFIs aim to meet the credit needs of poor households, there are other missing markets and constraints facing households, such as healthcare, infrastructure, and gaps in knowledge. These have implications in terms of the scale and profitability of client enterprises and efficiency of household budget allocation, which in turn impacts household well-being. The CMFR Microfinance Strategy Unit will address these issues through a series of workshops which will bring together MFI practitioners and sectoral experts (in energy, water, roads, health, etc). The latter will bring to the table knowledge of best practices in their specific areas, and each consultation workshop will result in long-term collaboration between with MFIs for implementing specific pilots.

2. Bandhan
Bandhan is working towards the twin objective of poverty alleviation and women empowerment. It started as a Capacity Building Institution (CBI) in November 2000 under the leadership of Mr. Chandra Shekhar Ghosh. During such time, it was giving capacity building support to local microfinance institutions working in West Bengal. Bandhan opened its first microfinance branch at Bagnan in Howrah district of West Bengal in July 2002. Bandhan started with 2
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branches in the year 2002-03 only in the state of West Bengal and today it has grown as strong as 412 branches across 6 states of the country! The organization had recorded a growth rate of 500% in the year 2003-04 and 611% in the year 2004-05. Till date, it has disbursed a total of Rs. 587 crores among almost 7 lakh poor women. Loan outstanding stands at Rs. 221 crores. The repayment rate is recorded at 99.99%. Bandhan has staff strength of more than 2130 employees.

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Operational Methodology
Bandhan follows a group formation, individual lending approach. A group of 10-25 members are formed. The clients have to attend the group meetings for 2 successive weeks. 2 weeks hence, they are entitled to receive loans. The loans are disbursed individually and directly to the members.

Economic and Social Background of Clients

Landless and asset less women Family of 5 members with monthly income less than Rs. 2,500 in rural and Rs.3,500 in urban Those who do not own more than 50 decimal (1/2acre) of land or capital of its equivalent value

Loan Size
The first loan is between Rs. 1,000 Rs. 7,000 for the rural areas and between Rs. 1,000 Rs. 10,000 for the urban areas. After the repayment, they are entitled to receive a subsequent loan which is Rs 1,000 - 5,000 more than the previous loan.

Service Charge
Bandhan charges a service charge of 12.50% flat on loan amount. Bandhan initially charged 17.50%. However from 1st July 2005, it has slashed down its lending rate to 15.00%. Then it was further reduced to 12.50% in May 2006. The reason is obvious. As overall productivity increased, operational costs decreased. Bandhan, being a nonprofit organization wanted the benefit of low costs to ultimately trickle down to the poor.

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Monitoring System
The various features of the monitoring system are: A 3 tier monitoring system Region, Division and Head Office Easy reporting system with a prescribed checklist format Accountability at all levels post monitoring phase Cross- checking at all the levels The management team of Bandhan spends 90.00% of time at the field

Liability structure for Loans

When a member wants to join Bandhan, she at first has to get inducted into a group. After she gets inducted into the group, the entire group proposes her name for a loan in the Resolution Book. Two members of the group along with the members husband have to sign as guarantors in her loan application form. If she fails to pay her weekly installment, the group inserts peer pressure on her. The sole purpose of the above structure is simply to create peer pressure.

3. Grameen Bank
The Grameen Model which was pioneered by Prof Muhammed Yunus of Grameen Bank is perhaps the most well known, admired and practiced model in the world. The model involves the following elements. Homogeneous affinity group of five Eight groups form a Centre Centre meets every week Regular savings by all members Loan proposals approved at Centre meeting
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 Loan disbursed directly to individuals All loans repaid in 50 installments The Grameen model follows a fairly regimented routine. It is very cost intensive as it involves building capacity of the groups and the customers passing a test before the lending could start. The group members tend to be selected or at least strongly vetted by the bank. One of the reasons for the high cost is that staff members can conduct only two meetings a day and thus are occupied for only a few hours, usually early morning or late in the evening. They were used additionally for accounting work, but that can now be done more cost effectively using computers. The model is also rather meeting intensive which is fine as long as the members have no alternative use for their time but can be a problem as members go up the income ladder. The greatness of the Grameen model is in the simplicity of design of products and delivery. The process of delivery is scalable and the model could be replicated widely. The focus on the poorest, which is a value attribute of Grameen, has also made the model a favorite among the donor community. However, the Grameen model works only under certain assumptions. As all the loans are only for enterprise promotion, it assumes that all the poor want to be self-employed. The repayment of loans starts the week after the loan is disbursed the inherent assumption being that the borrowers can service their loan from the ex-ante income.

4. SKS Microfinance(CEO-Vikram Akula)

Many companies say they protect the interests of their customers. Very few actually sit in dirt with them, using stones, flowers, sticks, and chalk powder to figure out if they will be able to repay a $20 loan at $1 a month. With this approach, this company has created its own
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loyal gang of over 2 million customers. Its borrowers include agricultural laborers, mom-and-pop entrepreneurs, street vendors, home based artisans, and small scale producers, each living on less than $2 a day. It works on a model that would allow micro-finance institutions to scale up quickly so that they would never have to turn poor person away. Its model is based on 3 principles-

1. Adopt a profit-oriented approach in order to access commercial capital

Starting with the pitch that there is a high entrepreneurial spirit amongst the poor to raise the funds, SKS converted itself to for-profit status as soon as it got break even and got philanthropist Ravi Reddy to be a founding investor. Then it secured money from parties such as Unitus, a Seattle based NGO that helps promote micro-finance; SIDBI; and technology entrepreneur Vinod Khosla. Later, it was able to attract multimillion dollar lines of credit from Citibank, ABN Amro, and others.

2. Standardize products, training, and other processes in order to boost capacity

They collect standard repayments in round numbers of 25 or 30 rupees. Internally, they have factory style training models. They enroll about 500 loan officers every month. They participate in theory classes on Saturdays and practice what they have learned in the field during the week. They have shortened the training time for a loan officer to 2 months though the average time taken by other industry players is 4-6 months.

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3. Use Technology to reduce costs and limit errors

It could not find the software that suited its requirements, so it they built their own simple and user friendly applications that a computerilliterate loan officer with a 12th grade education can easily understand. The system is also internet enabled. Given that electricity is unreliable in many areas they have installed car batteries or gas powered generators as back-ups in many areas.

4. Scaling up Customer Loyalty

Instead of asking illiterate villagers to describe their seasonal pattern of cash flows, they encourage them to use colored chalk powder and flowers to map out the village on the ground and tell where the poorest people lived, what kind of financial products they needed, which areas were lorded over by which loan sharks, etc. They set peoples tiny weekly repayments as low as $1 per week and health and whole life insurance premiums to be $10 a year and 25 cents per week respectively. They also offer interest free emergency loans. The salaries of loan officers are not tied to repayment rates and they journey on mopeds to borrowers villages and schedule loan meetings as early as 7.00 A.M. Deep customer loyalty ultimately results in a repayment rate of 99.5%.

5. Leveraging the SKS brand

Its payoff comes from high volumes. They are growing at 200% annually, adding 50 branches and 1, 60,000 new customers a month. They are also using their deep distribution channels for selling soap, clothes, consumer electronics and other packaged goods.

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Marketing of Microfinance Products

1. Contract Farming and Credit Bundling Banks and financial institutions have been partners in contract farming schemes, set up to enhance credit. Basically, this is a doable model. Under such an arrangement, crop loans can be extended under tie-up arrangements with corporate for production of high quality produce with stable marketing arrangements provided and only, provided the price setting mechanism for the farmer is appropriate and fair.

2. Agri Service Centre Rabo India

Rabo India Finance Pvt Ltd. has established agri-service centres in rural areas in cooperation with a number of agri-input and farm services companies. The services provided are similar to those in contract farming, but with additional flexibility and a wider range of products including inventory finance. Besides providing storage facilities, each centre rents out farm machinery, provides agricultural inputs and information to farmers, arranges credit, sells other services and provides a forum for farmers to market their products.

3. Non Traditional Markets

Similarly, Mother Dairy Foods Processing, a wholly owned subsidiary of National Dairy Development Board (NDDB) has established auction markets for horticulture producers in Bangalore. The operations and maintenance of the market is done by NDDB. The project, with an outlay of Rs.15 lakh, covers 200 horticultural farmers associations with 50,000 grower members for wholesale marketing.
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Their produce is planned with production and supply assurance and provides both growers and buyers a common platform to negotiate better rates.

4. Apni Mandi
Another innovation is that of The Punjab Mandi Board, which has experimented with a farmers market to provide small farmers located in proximity to urban areas, direct access to consumers by elimination of middlemen. This experiment known as "Apni Mandi" belongs to both farmers and consumers, who mutually help each other. Under this arrangement a sum of Rs. 5.2 lakh is spent for providing plastic crates to 1000 farmers. Each farmer gets 5 crates at a subsidized rate. At the mandi site, the Board provides basic infrastructure facilities. At the farm level, extension services of different agencies are pooled in. These include inputs subsidies, better quality seeds and loans from Banks. Apni Mandi scheme provides self-employment to producers and has eliminated social inhibitions among them regarding the retail sale of their produce.

Top 50 Microfinance Institutions in India: List: Top 50 Microfinance Institutions in India by Loan Amount Outstanding for 2010.
1. SKS Microfinance Ltd (SKSMPL). 2. Spandana Sphoorty Financial Ltd (SSFL). 3. Share Micro fin Limited (SML) 4. Asmitha Micro fin Ltd (AML). 5. Shri Kshetra Dharmasthala Rural Development Project (SKDRDP). 6. Bhartiya Samruddhi Finance Limited (BSFL).
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7. Bandhan Society. 8. Cashpor Micro Credit (CMC). 9. Grama Vidiyal Micro Finance Pvt Ltd (GVMFL). 10. Grameen financial servicesPvt Ltd (GFSPL). 11. Madura Micro Finance Ltd (MMFL). 12. BSS Microfinance Bangalore Pvt Ltd (BMPL). 13. Equitas Micro Finance India P Ltd (Equitas). 14. Bandhan Financial Services Pvt Ltd (BFSPL). 15. Sarvodaya Nano Finance Ltd (SNFL). 16. BWDA Finance Limited (BFL). 17. Ujjivan FinancialServices Pvt Ltd (UFSPL). 18. Future Financial Services Chittoor Ltd (FFSL). 19. ESAF Microfinance & Investments Pvt. Ltd (EMFIL). 20. S.M.I.L.E Microfinance Limited. 21. SWAWS Credit Corporation India Pvt Ltd (SCCI). 22. Sanghamithra Rural Financial Services (SRFS). 23. Saadhana Micro fin. 24. Gram Utthan Kendrapara. 25. Rashtriya Seva Samithi (RASS). 26. Sahara Utsarga Welfare Society (SUWS). 27. Sonata Finance Pvt Ltd (Sonata). 28. Rashtriya Gramin Vikas Nidhi. 29. Arohan Financial Services Ltd (AFSL). 30. Janalakshmi Financial Services Pvt Ltd (JFSPL). 31. Annapurna Financial Services Pvt Ltd. 32. Hand in Hand (HiH).

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33. Payakaraopeta Womens Mutually Aided Co-operative Thrift and Credit Society (PWMACTS) 34. Aadarsha Welfare Society(AWS) 35. Adhikar 36. Village Financial Services Pvt Ltd (VFSPL) 37. Sahara Uttarayan 38. RORES Micro Entrepreneur Development Trust(RMEDT) 39. Centre for Rural Social Action (CReSA) 40. Indur Intideepam Federation Ltd (IIMF). 41. Welfare Organization for MultipurposeMass Awareness Network (WOMAN) 42. Pragathi Mutually Aided Cooperative Credit and Marketing Federation Ltd(PMACS) 43. Indian Association for Savings and Credit(IASC) 44. Sewa Mutually Aided Cooperative Thrift Societies Federation Ltd (Sewa) 45. Initiatives for Development Bangalore, Foundation (IDF) 46. Gandhi Smaraka Grama Seva Kendram (GSGSK) 47. Swayamshree Micro Credit Services (SMCS) 48. ASOMI 49. Janodaya Trust 50. Community Development Centre (CDC)

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CHAPTER NO.5 RECOMMENDATIONS, SUGGESTIONS AND CONCLUSION

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Success Factors of Micro-Finance in India

Over the last ten years, successful experiences in providing finance to small entrepreneur and producers demonstrate that poor people, when given access to responsive and timely financial services at market rates, repay their loans and use the proceeds to increase their income and assets. This is not surprising since the only realistic alternative for them is to borrow from informal market at an interest much higher than market rates. Community banks, NGOs and grass root savings and credit groups around the world have shown that these microenterprise loans can be profitable for borrowers and for the lenders, making microfinance one of the most effective poverty reducing strategies.

For NGOs
1. The field of development itself expands and shifts emphasis with the pull of ideas, and NGOs perhaps more readily adopt new ideas, especially if the resources required are small, entry and exit are easy, tasks are (perceived to be) simple and peoples acceptance is high all characteristics (real or presumed) of microfinance. 2. Canvassing by various actors, including the National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), Friends of Womens World Banking (FWWB), Rashtriya Mahila Kosh (RMK), Council for Advancement of Peoples Action and Rural Technologies (CAPART), Rashtriya Gramin Vikas Nidhi (RGVN), various donor funded programmes especially by the International Fund for Agricultural Development (IFAD), United Nations Development Programme (UNDP), World Bank and Department for International Development, UK (DFID)], and lately commercial banks, has greatly added to the
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idea pull. Induced by the worldwide focus on microfinance, donor NGOs too have been funding microfinance projects. One might call it the supply push. 3. All kinds of things from khadi spinning to Nadep compost to balwadis do not produce such concrete results and sustained interest among beneficiaries as microfinance. Most NGO-led microfinance is with poor women, for whom access to small loans to meet dire emergencies is a valued outcome. Thus, quick and high customer satisfaction is the USP that has attracted NGOs to this trade. 4. The idea appears simple to implement. The most common route followed by NGOs is promotion of SHGs. It is implicitly assumed that no technical skill is involved. Besides, external resources are not needed as SHGs begin with their own savings. Those NGOs that have access to revolving funds from donors do not have to worry about financial performance any way. The chickens will eventually come home to roost but in the first flush, it seems all so easy. 5. For many NGOs the idea of organising forming a samuha has inherent appeal. Groups connote empowerment and organising women is a double bonus. 6. Finally, to many NGOs, microfinance is a way to financial sustainability. Especially for the medium-to-large NGOs that are able to access bulk funds for on-lending, for example from SIDBI, the interest rate spread could be an attractive source of revenue than an uncertain, highly competitive and increasingly difficult-to-raise donor funding.

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 For Financial Institutions and banks

Microfinance has been attractive to the lending agencies because of demonstrated sustainability and of low costs of operation. Institutions like SIDBI and NABARD are hardnosed bankers and would not work with the idea if they did not see a long term engagement which only comes out of sustainability (that is economic attractiveness). On the supply side, it is also true that it has all the trappings of a business enterprise, its output is tangible and it is easily understood by the mainstream. This also seems to sound nice to the government, which in the post liberalization era is trying to explain the logic of every rupee spent. That is the reason why microfinance has attracted mainstream institutions like no other developmental project. Perhaps the most important factor that got banks involved is what one might call the policy push. Given that most of our banks are in the public sector, public policy does have some influence on what they will or will not do. In this case, policy was followed by diligent, if meandering, promotional work by NABARD. The policy change about a decade ago by RBI to allow banks to lend to SHGs was initially followed by a seven-page memo by NABARD to all bank chairmen, and later by sensitization and training programmes for bank staff across the country. Several hundred such programmes were conducted by NGOs alone, each involving 15 to 20 bank staff, all paid for by NABARD. The policy push was sweetened by the NABARD refinance scheme that offers much more favorable terms (100% refinance, wider spread) than for other rural lending by banks. NABARD also did some system setting work and banks lately have been given targets. The canvassing, training, refinance and close follow up by NABARD has resulted in widespread bank involvement. Moreover, for
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banks the operating cost of microfinance is perhaps much less than for pure MFIs. The banks already have a vast network of branches. To the extent that an NGO has already promoted SHGs and the SHG portfolio is performing better than the rest of the rural (if not the entire) portfolio, microfinance via SHGs in the worst case would represent marginal addition to cost and would often reduce marginal cost through better capacity utilization. In the process the bank also earns brownie points with policy makers and meets its priority sector targets. It does not take much analysis to figure out that the market for financial services for the 50-60 million poor households of India, coupled with about the same number who are technically above the poverty line but are severely under-served by the financial sector, is a very large one. Moreover, as in any emerging market, though the perceived risks are higher, the spreads are much greater. The traditional commercial markets of corporate, business, trade, and now even housing and consumer finance are being sought by all the banks, leading to price competition and wafer thin spreads. Further, bank-groups are motivated by a number of crossselling opportunities in the market, for deposits, insurance, remittances and eventually mutual funds. Since the larger banks are offering all these services now through their group companies, it becomes imperative for them to expand their distribution channels as far and deep as possible, in the hope of capturing the entire financial services business of a household. Finally, both agri-input and processing companies such as EID Parry, fast-moving consumer Goods (FMCG) companies such as Hindustan Levers and consumer durable companies such as Philips have realized the potential of this big market and are actively using SHGs as entry points. Some amount of free-riding is
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taking place here by companies, for they are using channels which were built at a significant cost to NGOs, funding agencies and/or the government. On the whole, the economic attractiveness of microfinance as a business is getting established and this is a sure step towards mainstreaming. We know that mainstreaming is a mixed blessing, and one tends to exchange scale at the cost of objectives. So it needs to be watched carefully.

Issues in Microfinance 1. Sustainability

The first challenge relates to sustainability. MFI model is comparatively costlier in terms of delivery of financial services. An analysis of 36 leading MFIs by Jindal & Sharma shows that 89% MFIs sample were subsidy dependent and only 9 were able to cover more than 80% of their costs. This is partly explained by the fact that while the cost of supervision of credit is high, the loan volumes and loan size is low. It has also been commented that MFIs pass on the higher cost of credit to their clients who are interest insensitive for small loans but may not be so as loan sizes increase. It is, therefore, necessary for MFIs to develop strategies for increasing the range and volume of their financial services.

2. Lack of Capital
The second area of concern for MFIs, which are on the growth path, is that they face a paucity of owned funds. This is a critical constraint in their being able to scale up. Many of the MFIs are socially oriented institutions and do not have adequate access to financial capital. As a result they have high debt equity ratios. Presently, there is no reliable mechanism in the country for meeting the equity
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requirements of MFIs. The IPO issue by Mexico based Comparators was not accepted by purists as they thought it defied the mission of an MFI. The IPO also brought forth the issue of valuation of an MFI. The book value multiple is currently the dominant valuation methodology in microfinance investments. In the case of startup MFIs, using a book value multiple does not do justice to the underlying value of the business. Typically, start ups are loss making and hence the book value continually reduces over time until they hit breakeven point. A book value multiplier to value start ups would decrease the value as the organization uses up capital to build its business, thus accentuating the negative rather than the positive.

3. Financial service delivery

Another challenge faced by MFIs is the inability to access supply chain. This challenge can be overcome by exploring synergies between microfinance institutions with expertise in credit delivery and community mobilization and businesses operating with production supply chains such as agriculture. The latter players who bring with them an understanding of similar client segments, ability to create microenterprise opportunities and willingness to nurture them, would be keen on directing microfinance to such opportunities. This enables MFIs to increase their client base at no additional costs. Those businesses that procure from rural India such as agriculture and dairy often identify finance as a constraint to value creation. Such businesses may find complementarities between an MFIs skills in management of credit processes and their own strengths in supply chain management. ITC Limited, with its strong supply chain logistics, rural presence and an innovative transaction platform, the
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e-choupal, has started exploring synergies with financial service Providers including MFIs through pilots with vegetable vendors and farmers. Similarly, large FIs such as Spandana foresee a larger role for themselves in the rural economy ably supported by value creating partnerships with players such as Mahindra and Western Union Money Transfer. ITC has initiated a pilot project called pushcarts scheme along with BASIX (a microfinance organization in Hyderabad). Under this pilot, it works with twenty women head load vendors selling vegetables of around 10- 15 kgs per day. BASIX extends working capital loans of Rs.10, 000/- , capacity building and business development support to the women. ITC provides support through supply chain innovations by: 1. Making the Chou pal Fresh stores available to the vendors, this avoids the hassle of bargaining and unreliability at the traditional mandis (local vegetable markets). The women are able to replenish the stock from the stores as many times in the day as required. This has positive implications for quality of the produce sold to the end consumer. 2. Continuously experimenting to increase efficiency, augmenting incomes and reducing energy usage across the value chain. For instance, it has forged a partnership with National Institute of Design (NID), a pioneer in the field of design education and research, to design user-friendly pushcarts that can reduce the physical burden. 3. Taking lessons from the pharmaceutical and telecom sector to identify technologies that can save energy and ensure temperature control in push carts in order to maintain quality of the vegetables throughout the day. The model augments the incomes of the vendors
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from around Rs.30-40 per day to an average of Rs.150 per day. From an environmental point of view, push carts are much more energy efficient as opposed to fixed format retail outlets.

Recommendations and suggestions

Under mention are the few recommendations and suggestions, which I felt during my project on Micro Finance is:1. The concept of Micro Finance is still new in India. Not many people are aware the Micro Finance Industry. So apart from Government programmers, we the people should stand and create the awareness about the Micro Finance. 2. There are many people who are still below the poverty line, so there is a huge demand for MFIs in India with proper rules and regulations. 3. There is huge demand and supply gap, in money demand by the poor and supply by the MFIs. So there need to be an activate participation by the Pvt. Sector in this Industry. 4. One strict recommendation is that there should not over involvement of the Government in MFIs, because it will stymie the growth and prevent the others MFIs to enter. 5. According to me the Micro Loan should be given to the women only, because by this only, MFIs can maintain their repayment ratio high, without any collateral. 6. Many people say that the interest rate charge by the MFIs is very high and there should be compelled cap on it. But what I felt during my personal survey, that the high rates are justifiable. Now by this example we will get agree.
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Suppose a big commercial bank gives Rs 1 million to an individual and in the same way a MFI gives Rs 100 to 10.000 customers. So its obvious that man power cost and operating cost are higher for the MFIs. So according to me rates are justifiable, But with limitations.

Conclusion
Microfinance has a long way despite doubts expressed and criticism launched about its viability, impact, and poverty fighting capacity. There should, however, be no room for complacency. The task of building a poverty-free world is yet to be finished. There are still over 1.2 billion people living in extreme poverty on this planet. They are not living in one country or region but spread all over the world. The last decade has witnessed an impressive growth of microfinance; lack of funding is still considered a major obstacle in the way of its growth. However, it is encouraging that the situation is changing. Given the experiences of large and fast growing the last decade has witnessed an impressive growth of microfinance; lack of funding is still considered a major obstacle in the way of its growth. However, it is encouraging that the situation is changing. Given the experiences of large and fast growing Microfinance, there are lessons for others who want to increase their outreach and operate on a sustainable basis. Fortunately, there is an increasing awareness about the power of microfinance, and the need to support its growth. Many players have committed themselves to its promotion. Governments are taking an increasing interest in it. More banks, both national and international are coming forward with different support packages. NGO-MFI partnerships are on the increase. New instruments are being used to solve the problem of funding. It is expected that in the coming years more ideas, innovations,
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cost saving devices, and players will continue to reinforce the microfinance movement and increase its expansion. At the end I would conclude that, Micro Finance Industry has the huge potential to grow in future, if this Industry grows then one day well all see the new face of India, both in term of high living standard and happiness. One solution by which we all can help the poor people, i.e. in a whole year a medium and a rich class people spends more than Rs 10,000 on them without any good reason. Instead of that, by keeping just mere Rs, 3000 aside and donate that amount to the MFIs, then at the end of the year the total amount in the hands of poor would be ( average 500 million people *Rs 3000)=Rs 1,500,000,000,000 . Just imagine where would be India in next 10 years. Private MFIs in India, barring a few exceptions, are still fledgling efforts and are therefore unregulated. Their outreach is uneven in terms of geographical spread. They serve micro finance clients with varying quality and using different operating models. Regulatory framework should be considered only after the sustainability of MFI model as a banking enterprise for the poor is clearly established.

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CHAPTER NO. 6 BIBLIOGRAPHY

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WEBSITES www.scribd.com www.microfinanceindia.org www.ifmr.ac.in www.google.com 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 www.slideshare.net

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