a REPORT ON

MICROFINANCE - THREATS AND OPPORTUNITIES

Submitted By:

MANORANJAN PATRA
BM0308BM048
Under the Guidance of

Mr. MANAS RANJAN DAS Mrs. T.SRIDEVI

UNIT HEAD FACULTY
BASIX -Khurda Unit, Jatni Bharatiya Vidya Bhavan

BHUBANESWAR KENDRA

BHAVAN’S CENTRE FOR COMMUNICATION & MANAGEMENT

39,KHARVEL NAGAR,UNIT-III,BBSR-751001,ORISSA

APRIL-2010

1
 STUDENT DECLARATION

I hereby undertake and declare that this submission is my original

work and, to the best of my knowledge and belief, it contains no
material previously published or written by another person nor
material which has been accepted for the award of any other
degree or diploma of any Institute or other University of higher
learning , except where due acknowledgement has been made in
the text.

Signature

Name of Student: Manoranjan Patra

Registration No. BIM0308BM048

2
 Certificate by guide

This is to certify that work entitled Project title “MICROFINANCE - THREATS

AND OPPORTUNITIES” is a piece of work done by Student’s name
Manoranjan Patra under my guidance and supervision for the partial
fulfillment of degree of PGDBM, Bharatiya Vidya Bhavan, Bhubaneswar.

To the best of my knowledge and belief the thesis:

a. Embodies the work of the candidate himself.

b. Has duly been completed.
c. Fulfills the requirements of the rules and regulations relating to the
summer internship of the institute.
d. Is up-to the standard both in respect to contents and language for
being referred to the examiner.

Signature of the Faculty Guide

Name of Faculty guide: Mrs.T.Sridevi
Date:

3
 CERTIFICATE OF APPROVAL
This is to certify that the report entitled:

“MICROFINANCE - THREATS AND OPPORTUNITIES”

In BASIX

KHURDA

Submitted by Mr. MANORANJAN PATRA (Regn.No BIMO308BMO48),

Bharatiya Vidya Bhavan, Bhubaneswar Kendra, Orissa towards partial
fulfillment of the requirements for the award of the degree of Post Graduate
Diploma in Management (PGDM) is a bona fide record of the work carried out by
him under the able guidance of Mrs.T.SRIDEVI, faculty, Bharatiya Vidya
Bhavan, Bhubaneswar Kendra, Orissa.

DIRECTOR DEAN

4
 Acknowledgements

“No good work flows without the help from Faculty Members

Industrial Professionals, Colleagues, Organization and Friends”

First of all I would like to thank Mr. Manas Ranjan Das, Unit Head, Khurda Unit , BASIX

for providing me an opportunity to give effort to my project report from my working hours.

I would also like to thank Mr. Ranjit Patro, Head Accountant of the Khurda Unit for their

valuable guidance, Cooperation and encouragement which helped me lot in my project.

I am also thankful to my faculty in-charge Mrs.T.Sridevi for her guidance and valuable

input and advice during my project.

I am also thankful to Mr. Patanjali Behera & Mr. Manoj Ku. Behera, my senior collegues,

who helped me in understanding my topic in depth.

At the last, I would like to thank each individual who some or other way helped me to

complete my project.

MANORANJAN PATRA

5
 Contents

ACKWOLEDGEMENT

ABSTRACT

Overview of the Microfinance Sector

Top 50 Microfinance Institutions

Legal and Regulatory Framework for the (MFI’s) in India

Societies Registration Act, 1860
Indian Trusts Act, 1882
Not-For-Profit Companies Registered Under Section 25 Of Companies Act,1956

Analysis

Micro credit model

GRAMEEN Bank

About GRAMEEN Bank

Working model of Grameen bank
The Repayment Mechanism
Criticism of Grameen Bank

Self Help Group (SHG’s)

Concept of SHGs
Need of SHG‘s
Structure of SHGs

Joint Liability Groups (JLGs)

Difference between SHGs and JLGs

How JLGs formed
JLG features

BASIX

Services of basix
Availability of basix service in india
Technology assisted financial inclusion by BASIX
6
Vidya samrudhi
Basix academy
Strategy for livelihood promotion
Staff
Mis
Micro credit for water and sanitation
Social performance reporting award
Values of basix
Vision of basix
Bankers and partners of basix
Senior management group profile of basix
Strengths of basix
Issues of basix

NABARD Initiative in Micro Finance

Introduction
Role of NABARD
Organization Structure
NABARD‘s OFFICES all over INDIA
Financial Santa Clause NABARD
How NABARD helps Banks and MFI‘s in augmenting?
How NABARD manages their repayment ratio
How NABARD gives loan to the Institutions?

Credit institutions as a Political tool: Debt relief in India

Product Design

How MFI’s manage their repayment and Risk management

What is Risk Management?

Benefit of Risk Management
Financial Risks
Liquidity risk
Operational Risks
Strategic Risks

Why micro finance provides loan to the women only

7
Why MFI‘s being critized for providing loans to the women only?

How the recent slowdown affects the MFI’s

How the MFI‘s find opportunities within the crisis

MFI’s being criticized because of high interest rate

Why Microcredit Rates are so high?

Inappropriate comparison
Rate Ceilings: Not the Answer

SWOT Analysis of micro finance

Interview of end users

Future of Micro Finance

Recommendations and Suggestions

Conclusion

References

8
 ABSTRACT of the Project:

Micro-Finance refers to ―small savings, credit and insurance services extended to

socially and economically disadvantaged segments of society, for enabling them to raise their
income levels and improve living standards‖. The main aim of Micro-Finance is too provide loan
to the poor people or to below poverty line, who are not able borrow from other sources and to
make their living standard better.

Micro- finance‘s concept was first given by the Nobel laureate Prof. Mohammad Yunus in
1976 and started Grameen Bank in that year and from then many countries has followed Grameen
Bank Model. It is not possible to cover each and every aspect of Micro Finance in this short
duration of time. But I have tried to cover main and the basics of Micro Finance. Through this
report any person who doesn‘t know anything about Micro Finance can easily understands and
makes decision on his own.

In this report I have tried to cover each and every important part related to the Micro
Finance Sector i.e. Business Model of Grameen Bank, SHG‘s and BASIX, how they formed, role
of Micro Finance in the current economy, study about their interest rates, role of women in the
economy, how the product is design, interview of NABARD executive and understand the
Business Model of NABARD, and many important things related to Micro Finance.

After successfully completion of my project, I understood many areas of Micro Finance. Like how
a company decides their interest rate, practically how SHGs formed, how the excess of
government intervention can create disaster for the MFIs, practically felt, how a Micro loan can
change the life of the individuals. Practical learning of Micro Finance industry by personal visits
the institutions and prepared the business model of the same. Now I can confidently say that, with
zero percentage o to 70 percentage knowledge in the field of Micro finance in just three months,
it‘s like Achievement for me and I will add this moment in my Achievements lists. What I feel
that, in this short period of time its difficult to understand the 100 percentage of the above
mentioned subject. But at last I am satisfied with my performance.

9
Overview of the Microfinance Sector
Micro-finance refers to ―small savings, credit and insurance services extended to socially and
economically disadvantaged segments of society, for enabling them to raise their income levels
and improve living standards‖. India‘s population is more than 1000 million, and it‘s the second
largest in term of population after China. India's GDP ranks among the top 15 economies of the
world. However, around 300 million people or about 80 million households, are living below the
poverty line, i.e. less than $2 per day according to the World Bank and the poorest are which
earns $1 per day .

Out of these 80 million house hold, 80% takes credit from the informal sources i.e. local
Zamidars, Chit Funds etc. With about 80 million households below poverty line and 80% out of
this is access from informal sector, so it‘s obvious to solve this problem and this gave birth to
Micro Finance Institutions (MFI‘s). MFIs include non-governmental organizations (NGOs),
credit unions, non-bank financial intermediaries, and even a few commercial banks.

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.

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 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.
10
 Microcredit, Microfinance and Micro plus

Microcredit refers specifically to loans and the credit needs of clients, while Microfinance covers
a broader range of financial services that create a wider range of opportunities for success.
Examples of these additional financial services include savings, insurance, housing loans and
remittance transfers. The local MFI might also offer Microfinance plus activities such as
entrepreneurial and life skills training, and advice on topics such as health and nutrition,
sanitation, improving living conditions, and the importance of educating children.

Top 50 MICROFINANCE INSTITUTIONS :(as on 20/3/09)

Rank Name Country Risk Returns

1 ASA Bangladesh 56 40

2 Bandhan Society and India 42 1

NBFC)
3 Banco do Nordeste Brazil 213 25
4 Fundación Mundial de la Colombia 193 1
Mujer Bucaramanga
5 FONDEP Micro-Crédit Morocco 196 1
6 Amhara Credit and Ethiopia 118 42
Savings Institution
7 Banco Compartamos, Mexico 295 11
S.A., Institución de Banca
Múltiple
8 Association Al Amana for Morocco 133 1
the Promotion of Micro-
Enterprises Morocco
9 Fundación Mundo Mujer Colombia 141 1
Popayán
10 Fundación WWB Colombia 155 4
Colombia - Cali
11 Consumer Credit Union Russia 19 1
'Economic Partnership'
12 Fondation Banque Morocco 219 1
Populaire pour le Micro-
Credit
13 Microcredit Foundation of India 7 185
India
14 EKI Bosnia and 242 1
Herzegovina
15 Saadhana Microfin Society India 73 1
16 Jagorani Chakra Bangladesh 128 1
11
 Foundation
17 Grameen Bank Bangladesh 100 62
18 Partner Bosnia and 230 1
Herzegovina
19 Grameen Koota India 156 1
20 Caja Municipal de Ahorro Peru 222 119
y Crédito de Cusco
21 Bangladesh Rural Bangladesh 126 205
Advancement Committee
22 AgroInvest Serbia 222 1
23 Caja Municipal de Ahorro Peru 220 101
y Crédito de Trujillo
23 Sharada's Women's India 55 13
Association for Weaker
Section
24 MIKROFIN Banja Luka Bosnia and 205 1
Herzegovina
25 Khan Bank (Agricultural Mongolia 280 59
Bank of Mongolia LLP)
26 INECO Bank Armenia 202 39
27 Fondation Zakoura Morocco 194 1

*Risk, which looks at the quality of their loan portfolios, measured as the percent of the portfolio
at risk greater than 30 days; and return, which is measured as a combination of return on equity
and return on assets.

From this above table we can notice that the Risk of companies is measured as the percentage of
Portfolio at Risk (PAR) which means and return is measured as a combination of ROA and ROE.

ROA = Net Operating Income-Taxes Average Assets

Return on Assets (ROA) indicates how well an MFI is managing its assets to optimize its
profitability. The ratio includes not only the return on the portfolio, but also all other revenue
generated from investments and other operating activities. From the above list we can notice that,
there are seven companies of India in top 50 companies in the world. There is a huge potential
for India to grow in this sector, because out of total 500 million poor people from all over the
world, who is getting beneficial from the micro finance institutions, 80 to 90 million are from
India only. So there is still a huge market and opportunities in this segment. The total loan that
the MFI‘s had provided to the poor people in India crosses Rs 24 billion till October 08. And this
is only 40% of the total poor. If this turns into 100%, then we will see the new face of India.

12
Legal and Regulatory Framework for the Microfinance Institutions
in India:

1. SOCIETIES REGISTRATION ACT, 1860:

NGOs are mostly registered under the Societies Registration Act, 1860. Since these entities were
established as voluntary, not-for-profit development organizations, their microfinance activities
were also established under the same legal umbrella. This act is applicable to the NGO‘s and the
main purpose is:
Relief of poverty
Advancement of education
Advancement of religion
Purposes beneficial to the community or a section of the community.

2. INDIAN TRUSTS ACT, 1882:

Some MFIs are registered under the Indian Trust Act, 1882 either as public charitable trusts or as
private, determinable trusts with specified beneficiaries/members.

3. NOT-FOR-PROFIT COMPANIES REGISTERED UNDER SECTION 25 OF

COMPANIES ACT, 1956:

An organization given a license under Section 25 of the Companies Act 1956 is allowed to be
registered as a company with limited liability without the addition of the words ‗Limited‘ or
‗Private Limited‘ to its name. It is also eligible for exemption from some of the provisions of the
Companies Act, 1956. For companies that are already registered under the Companies Act, 1956,
if the central government is satisfied that the objects of that company are restricted to the
promotion of commerce, science, art, religion, charity or any other useful purpose; and the
constitution of such company provides for the application of funds or other income in promoting
these objects and prohibits payment of any dividend to its members, then it may allow such co.
to register under co.s act 1956.

RATIO ANALYSIS: Financial ratios are useful indicators of a firm's performance and financial
situation. Financial ratios can be used to analyze trends and to compare the firm's financials to
those of other firms.

13
List Of MFI’s and their key Ratios:

Liquidity Ratios These ratios actually show the relationship of a firm‘s cash and other current
assets to its current liabilities. Two ratios are discussed under Liquidity ratios. They are: 1.
Current ratio 2. Quick/ Acid Test ratio. 1. Current ratio: This ratio indicates the extent to which
current liabilities are covered by those assets expected to be converted to cash in the near future.
Current assets normally include cash, marketable securities, accounts receivables, and
inventories. Current liabilities consist of accounts payable, short-term notes payable, current
maturities of long-term debt, accrued taxes and other accrued expenditures.

Current Ratio=Current Assets/Current Liabilities

S.no Companies As on 31.3.08(%) As on 31.3.07(%) Percentage

changed

1. Asmitha 18.0 6.81 195%

Microfinance

2. Basix 5.65 5.74 1.56%

Microfinance

3. Ujjivan 42 98 57%
Microfinance

4. Cashpro 17.88% 15.91

Microfinance
5. Trident 3.33 4.47 25.6%
microfinance
6. Samridhi 16.81 19.36%
Microfinance

Explanation:- Here we can notice that the current ratio of all the MFI‘s. There is a mixed picture
i.e.few company‘s ratio has dipped down and few went up, now we will see, why this so?
Asmitha Microfinance‘s ratio went up by whopping 195% in 2008 compared to 2007. This was
because of the high micro loan to the poor women and high cash and bank balance. So we can
came out of the conclusion that the Asmitha Microfinance has more current assets then there
liabilities to meet there short term obligations.
Basix Microfinance‘s ratio dipped down by mere 1.56% , reason for that there loans to the poor
went up by 61%, but there current liability ( other provision )but went up by 69%.

14
Cashpro Microfinance‘s has showed the highest percentage change from the previous year i.e.
205%. Its loan to the women went up by 121% and cash and bank balance by 52% and the
current liability went down by 35%.
Trident Microfinance‘s current ratio went down by 26%, because of the high current liabilities
and other provision.

Ujjivan Microfinance‘s ratio went down by 57%, its cash balance went up by 605 but its current
liabilities went up by 247%.

Capital Adequacy ratio: Capital adequacy ratio is the ratio which determines the capacity of a
bank in terms of meeting the time liabilities and other risk such as credit risk, market risk,
operational risk, and others. It is a measure of how much capital is used to support the banks' risk
assets. In short this ratio used to protect depositors and promote the stability and efficiency.
Under this 2 main ratio is there:

Comparison Asmitha Basix Trident SKS

among the Microfinance Microfinance microfinance
Companies (07-
08) Criteria
Capital
Capital To Assets 106.54% 12.63% 44.77% 19.52
ratio
Debts to Assets 89.79% 85.11% 35.79% -
Ratio
Earnings
ROA 1.24% 1.97% -1.92%
ROE 30.83% 18.46% -5.24% 23.47%
Operating self- 111.09% 114.4% 108.54% 121%
sufficiency ratio
Social Impact
% borrowers 60% 57% 69% 65%
below poverty line
% women 98% 97% 98% 94%
% landless 59% 61% 62% 53%
First time 27% 45% 32% 29%
borrowers

15
Explanation:
Calculating the debt ratio, we came to see that Asmitha microfinance institution is having the
highest debt ratio, i.e. 96.39%. That this company is highly leveraged one. The reason behind
such is better understandable form the balance sheet. In 2007-08, the company has issued long-
term loan, of Rs 3,030,818,584 and this was increased by more than 50 % from the previous
year.
From the above table we can notice that the, the Operating Self Sufficiency (OSS) ratio of the
SKS Micro Finance was the highest, this shows that how well the company is managing their
loan distribution amount or repayment amount to meet the operating expenses. By comparing
this ratio with others, we can predict the future of the organization.
Now if we notice social impact ratio‘s like % borrowers below poverty line, % of woman etc. are
very important for the economic development and the companies‘ contribution in reducing the
poverty.

The micro-credits model

• The model is fairly straightforward and simple.

• Focus on jump-starting self-employment, providing the capital for poor women to use their
innate "survival skills" to pull themselves out of poverty.

• Lend to women in small groups (credit circles), say of five or seven.

• Make loans of small amounts to two out of five.

• The three who have not received loans will be eligible only when this first round of loans has
been repaid.

• Draw up a weekly or bi-weekly repayment schedule.

• In case any member defaults the entire circle is denied access to credit.

• Banks have been given freedom to formulate their own lending norms keeping in view ground
realities. They have been asked to devise appropriate loan and savings products and the related
terms and conditions including size of the loan, unit cost, unit size, maturity period, grace period,
margins, etc.

16
GRAMEEN BANK

The Grameen Bank is a Microfinance Organization and community development bank started in
1976 by the Nobel Laureate, Professor Muhammad Yunus in Bangladesh that makes small loans
(known as microcredit) to the weaker sections, without requiring collateral or any deposit. The
word "Grameen", derived from the word "gram" or "village", means "of the village. In October
1983, the Grameen Bank Project was transformed into an independent bank by government
legislation. Grameen today has some 2,468 branches in Bangladesh, with a staff of 24,703 people
serving 7.34 million borrowers from 80,257 villages. Grameen‘s methods are applied in 58
countries — including the United States. Grameen Bank borrowers own 94% of the Bank. The
remaining 6% are owned by the government.

In October 1983 Yunus formed the Grameen (―villageǁ) Bank, based on principles of trust and
solidarity. There is no legal instrument (no written contract) between Grameen Bank and its
borrowers, the system works based on trust. In a country in which few women may take out
loans from large commercial banks, Grameen has focused on women borrowers as 97% of its
members are women.[ Because women (far more than men) could be counted on to invest the
loans in business and repay them on schedule, they became the overwhelming participants in
Grameen Bank, where they receive 97 percent of all credit.

Grameen bank follows the one principle that ―the more you have, the more you can get. In
other words, if you have little or nothing, you get nothing. According to a World Bank study of
Grameen, 5 percent of Grameen borrowers get out of poverty every year., according to
Grameen‘s figures, nearly two-thirds [64 percent] of borrowers who have been with Grameen for
five years are now out of poverty. And Grameen‘s indicators of poverty are much more stringent
than those of the World Bank, which defines poverty as earning less than a dollar per day.
Grameen‘s definition of poverty alleviate is not only based on financially sound of the family,
but they notice the 10 indicators and all must be met before they say that family is no longer
poor.. Indicators include such things as housing quality, adequate nutrition, and access to safe
water, school attendance by children, certain minimal savings, etc.

Working model of Grameen bank:

The manager first makes a round to the appointed area to introduce Grameen policies and
programs. When one approaches with genuine interests Bank manager asks her to gather 4 more
members to form a group. Every group has 5 members, one as its head. Only two members can
obtain loan at first. After 6 weeks of successful repayment another two can apply for loan. The
leader can only receive loan at last. 8 groups make a Center. And a center elects its leader for one
year, after one term the leader resigns and never be elected again.

Each borrower must belong to a five-member group. These groups do not provide any guarantee
for a loan to one of their members; repayment responsibility solely rests on the individual
borrower. However if one member of a group defaults, that group will never receive a loan from
Grameen. So it‘s a kind of social pressure exerted by the group members. Grameen enjoys very
high payback rates—over 98 percent.
17
Grameen bank is not only a Micro financing institution but it is Micro financing plus, which
means they not only provide credit to the borrowers this type of MFI believes that the poor need
more than just money to transform their lives. Typical services to supplement the credit include
discounted health care services, preventative health care education, literacy courses, vocational
training courses, technology courses, youth programs for children of borrowers, life/disability
insurance, and savings programs.

Grameen Bank is owned by the borrowers themselves — it is owned by the poor women who
rely on the microcredit loans for income generation. It is therefore tied to local money; each
branch has to be self-sustaining. Local branches get no money from outside — there is no
borrowing from the head office. The profit all goes back to the borrowers.

Grameen bank has 21,000 students with student loans, studying in medical schools and
elsewhere. They have also provided some 30,000 scholarships to the children of our borrowers
each year. They even give loans to beggars — poor people who go door-to-door, who we call
―struggling membersǁ — so they can stop begging and generate income through selling such
things as food, toys, or household items. They currently have 100,000 ―struggling membersǁ in
the program.

Loan Insurance

How loan insurance would be beneficiary for the borrowers? Borrowers always worry what will
happen to their debt if they die. Will the family members pay off their debt? They believe that if
their debt remains un repaid after their death The insurance program is very simple. Once a year,
on the last day of the year, the borrower is required to put in a small amount of money in a loan
insurance savings account. It is calculated on the basis of the outstanding loan and interest of the
borrower on that day. She. If a borrower dies any time during the next year, her entire
outstanding amount is paid up by the insurance fund which is created by the interest income of
the loan insurance savings account. In addition, her family receives back the amount she saved in
the loan insurance savings account. Borrowers find it unbelievably generous. If the outstanding
amount remains the same on two successive year-ends, the borrower does not have to put in any
extra money in the loan insurance savings account in the second year. Only if the balance is more
she has to put in money for the extra amount. Even if the outstanding amount happens to be
several times more at the time of her death than what it was on the preceding year-end, under the
rules of this program, the entire amount will still be paid off from the insurance fund.
All the borrowers of Grameen bank have to pledge the ―16 Decisionsǁ. Of course, many of the
women cannot read or write, so they have to listen to others recite the 16 Decisions, and then
have to memorize them. This has become an extremely important part of our microcredit
program. The ―16 Decisions‖ are mentioned under:

1. We shall follow and advance the four principles of Grameen Bank: Discipline, Unity, Courage
and Hard work – in all walks of our lives.
2. Prosperity we shall bring to our families.
3. We shall not live in dilapidated houses. We shall repair our houses and work towards
constructing new houses at the earliest.
4. We shall grow vegetables all the year round. We shall eat plenty of them and sell the surplus.
18
5. During the plantation seasons, we shall plant as many seedlings as possible.
6. We shall plan to keep our families small. We shall minimize our expenditures. We shall look
after our health.
7. We shall educate our children and ensure that they can earn to pay for their education.
8. We shall always keep our children and the environment clean.
9. We shall build and use pit-latrines.
10. We shall drink water from tube wells. If it is not available, we shall boil water or use alum.
11. We shall not take any dowry at our sons' weddings; neither shall we give any dowry at our
daughter's wedding. We shall keep our centre free from the curse of dowry. We shall not practice
child marriage.
12. We shall not inflict any injustice on anyone; neither shall we allow anyone to do so.
13. We shall collectively undertake bigger investments for higher incomes.
14. We shall always be ready to help each other. If anyone is in difficulty, we shall all help him
or her.
15. If we come to know of any breach of discipline in any centre, we shall all go there and help
restore discipline.
16. We shall take part in all social activities collectively

The Repayment Mechanism Following method is followed by Grameen for loan and
repayment. - One year loan - Equal weekly installments - Repayment starts one week after the
loan - Interest rate of 20% - Repayment amounts to 2% per week for fifty weeks - Interest
payment amounts to 2 taka per week for a 1000 taka loan

Criticism of Grameen Bank: As the Grameen model was ‗exported‘ overseas during the
1990‘s, the Bank continued to grow in Bangladesh. Client numbers grew steadily, but the
portfolio grew more quickly as clients took bigger loans and new types of loans (especially
housing). Those of working in Bangladesh increasingly heard that repayment rates were falling,
but that branch managers were massaging their performance figures by issuing new loans to
defaulters. These were immediately used to pay off the outstanding loan and hide the problem of
non-repayment.

There were also criticisms of the gender achievements of the Bank: did it merely get women to
take loans that they gave straight to their husbands?

Then, there were criticisms of the idea by Yunus that, of every Grameen Bank loan being used
for microenterprise, and every microenterprise being successful. Independent fieldwork showed
that Grameen Bank clients used their loans for many different purposes – business, food
consumption, health, education and even dowry.

Grameen Bank clients paid the kisti (weekly repayments) on their loans not from a single
microenterprise, but from patching together earnings from casual employment, self-employment,
remittances and a variety of loans from other sources. But, as clients stayed with Grameen Bank,
they were under pressure to take bigger, ordinary loans alongside new housing loans. As a result,
they took on levels of debt they could not service from their income. To stop them from
defaulting, they were issued with larger loans by Grameen branch managers to repay earlier
loans.
19
 SHGs

Self help group (shg) “A Self-Help Group (SHG) is a registered or unregistered group of micro
entrepreneurs having homogenous social and economic background voluntarily, coming together
to save small amounts regularly, to mutually agree to contribute to a common fund and to meet
their emergency needs on mutual help basis:” In short, SHG is a small group of rural poor, who
have voluntarily come forward to form a group for improvement of the social and economic
status of the members.

Concept of SHGs:

It can be formal (registered) or informal.

The concept underlines the principle of, Credit and Self Help.
Members of SHG agree to save regularly and contribute to a common fund.
The members agree to use this common fund and such other funds (like grants and loans from
banks), which they may receive as a group, to give small loans to needy members as per the
decision of the group.
The group members use wisdom and peer pressure use of credit and timely repayment thereof. In
fact, peer pressure has been recognized as an effective substitute for collaterals.

Need of SHG’s: The rural poor are incapacitated due to various reasons, such as; most of them
are socially backward, illiterate, with low motivation and poor economic base. Individually, a
poor is not only weak in socio-economic term but also lacks access to the knowledge and
information, which are the most important components of today‘s development process.
However, in a group, they are empowered to overcome many of these weaknesses. Hence, there
are needs for SHGs, which in specific terms are as under:-

 To mobilize the resources of the individual members for their collective economic
development.
 To uplift the living conditions of the poor.
 To create a habit of savings.
 Utilization of local resources.
 To mobilize individual skills for group‘s interest.
 To create awareness about rights.
 To assist the members financially at the time of need.
 To identify problems, analyzing and finding solutions in the group.
 To act as a media for socio-economic development of the village.
 To develop linkages with institutions of NGOs.
 To organize training for skill development.
 To help in recovery of loans.
 To gain mutual understanding, develop trust and self-confidence.
 To build up teamwork.
 To develop leadership qualities.
20
Structure of SHGs: Size of SHG

The ideal size of an SHG is 10 to 20 members. The disadvantage of having high number is that,
members cannot actively participate. Also, legally it is required that an informal group should
not be of more than 20 people.
The group need not be registered.

Condition required for membership for SHG’s

Members should be between the age group of 21-60 years.

From one family, only one person can become a member of an SHG. (More families can join
SHGs this way).
The group normally consists of either only men or only women. Because mixed group it would
hindered or obstruct free and frank discussions, or opening of the personal problem.
Women‘s groups are generally found to perform better. (They are better in savings and they
usually ensure better end use of loans).
Members should be homogenous i.e. should have the same social and financial background.
(Advantage: This makes it easier for the members to interact freely with each other, if members
are both from rich as well as poor class, the poor may hardly get an opportunity to express
themselves).

Comparative Analysis of Microfinance Services Offered To The Poor

PARAMETER Money Lenders Commercial Govt.Sponsored Financial

banks Programs Program of
MFIS’
Ease of Access High Low Low High
Lead time for Low Very high Very High Low-Medium
loans
Repayment Very Short Extreme Long Extreme Long Short
terms
Interest Rates Fixed and Rigid Fixed and easy Fixed and easy Flexible
Incentives None None None Repeat and larger
loan
Repeat Possible Possible but Possible but Stream credit is
Borrowing likely likely assured
Loan Access Very quick Extreme time Extreme time Simple and quick
Procedure consuming consuming
Collateral and Mandatory Required but Not required Not required
Demand hypothecation of although a charge social collateral is
Promissory Note asset may suffice on the assets used for physical
become automatic collateral

21
 Members should be rural poor (By poor one should be guided by the living conditions).

Year wise increase of No. of SHGs financed Cumulative no. of

SHG’s and their during the year (in SHGs financed (in
finance: Year lakh) lakh)
2001-02 1.98 4.61
2002-03 2.56 7.17
2003-04 3.62 10.79
2004-05 5.39 16.18
2005-06 6.20 22.38
2006-07 6.87 29.25
2007-08 7.94 37.67

Initially there was a slow progress in the programme up to 1999 as only 32,995 groups were
credit linked during the period 1992 to 1999. Since then the programme has been growing
rapidly and the number of SHGs financed increased from 81,780 in 1999-2000 to more than 6.20
lakh in 2005-06, 6.87 lakh in 2006-07 and 7.94 lakh in 2007-2008

Growth of linked SHG's in 13 Priority States

State 2003 2004 2005 2006 2007 2008

Assam 3,477 10,706 31,234 56,449 81,454 92,343
Bihar 8,161 16,246 28,015 46,221 72,339 83,776
Chhattisgarh 6,763 9,796 18,569 31,291 41703 49,887
Gujarat 13,875 15,974 24,712 34,160 43,572 51,340
Himachal 8,875 13,228 17,798 22,920 27,799 34,087
Pradesh
Jharkhand 7,765 12,647 21,531 30,819 37,317 41,889
Maharashtra 28,065 38,535 71,146 1,31,470 2,25,856 2,49,541
Madhya 15,271 27,095 45,105 57,125 70,912 80,136
Pradesh
Orissa 42,272 77,588 1,23,256 1,80,896 2,34,451 2,60,656
Rajasthan 22,742 33,846 60,006 98,171 1,37,837 1,58,690
Uttar 53,696 79,210 1,19,648 1,61,911 1,98,587 2,14,578
Pradesh
Uttaranchal 5,853 10,908 14,043 17,588 21,527 23,089
West Bengal 32,647 51,685 92,698 1,36,251 1,81,563 210,689
Total 2,49,462 3,97,464 6,67,761 1,005,272 1,374,917 1,550,701
% increase 59 68 51 37 13
22
Explanation:

From the above figure we can notice the growth of SHG‘s in top 13 states. From 07 to 08 no of
SHG‘s i.e. one group of SHG consists 10 to 15 members. We can noticed that the highest
percentage increased during the year between 04 -05.Over 90 percent of them women, and the
total number of SHG members who have ever benefited from the programme to about 51
million. Since some households have more than one member in the programme, the number of
families benefited is slightly smaller than these numbers imply. About half of them are below the
poverty line.

“Joint Liability Group (JLG) is a group of individuals coming together to borrow from the
financial institution. They share responsibility and stand as guarantee for each other.” The
individual wanting loans will have to form into a group where each member will be providing
cross guarantee for each other.

Difference between SHGs and JLGs

SHGs (Self Help Groups) JLGs (Joint Liability Groups)

• Minimum 10 members and maximum 20.

• Minimum 3 members and maximum 5.
• For SHGs meeting is compulsory.
• There is no necessary of compulsory meeting
• For SHGs the bank loan is available. for JLGs.
.
• SHG gets the benefit of the entire • For JLGs, they get the loan only from MFIs.
government scheme, which is viable for them.
• There is no benefit of any government
schemes for JLGs.

23
How JLGs formed

The JLG has to be formed by the LSA(LIVELIHOOD SERVICE ASSOCIATE):

After the formation, LSA has to carry out at least 2 meetings with the group member in order to
explain about BASIX, its product, process and procedure. After the meetings the group should
have clear understanding of the following:

BASIX branch office and Head Office address and contact numbers.


Name of the JLG and the Area Manager and Unit head of the concerned branch.


Clear understanding of Group Liability and role of the Group Leader.


Product details such as repayment term, daily repayment methodology, membership fee and
interest rate.

Before the JLG group formation, LSA has to complete the process of origination to verify the
group. Loan process for any particular group can start only after the group verification has been
done and group has been approved by the LSA. In case the group is not approved, the
verification process is to be redone. After that loan process is to be go further and for this the
group documents are again verified by the Field Executive at the time of appraisal.

JLG features:

JLG haves 5-6 members group.

The group should be either all male or female only in exception cases can there be a mixed
group.
Members within a group should have similar turnover/profit and group should be economically
homogeneous.
The group member should be well known to each other.
The group member should have their own business.
The groups have shop/ business in the same locality.
Lending may start from group size of not less than three members.

24
 BASIX

BASIX is a livelihood promotion institution established in 1996, working with over a million
and a half customers, over 90% being rural poor households and about 10% urban slum
dwellers.

BASIX works in 16 states - Andhra Pradesh, Karnataka, Orissa, Jharkhand, Maharashtra,

Madhya Pradesh, Tamilnadu, Rajasthan, Bihar, Chattisgarh, West Bengal, Delhi, Uttarakhand,
Sikkim, Meghalaya and Assam and over 22,400 villages. It has a staff of over 5,400 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 will strive to yield a competitive rate of return to its investors so as to
be able to access mainstream capital and human resources on a continuous basis.

BASIX strategy is to provide a comprehensive set of livelihood promotion services which

inlcude Financial Inclusion Services (FINS), Agricultural / Business Development Services
(Ag/BDS) and Institutional Development Services (IDS) to rural poor households under one
umbrella.

OUR SERVICES

BASIX strategy is to provide a comprehensive set of livelihood promotion services which

inlcude Financial Inclusion Services (FINS), Agricultural / Business Development Services
(Ag/BDS) and Institutional Development Services (IDS) to rural poor households under one
umbrella.

25
The BASIX Livelihood Triad includes the following services.

FINANCIAL Agricultural/Business INSTITUIONAL

INCLUSION SERVICES Development Services DEVELOPMENT
(FINS) (Ag/BDS) SERVICES (IDS)

Savings: (Direct and as Productivity enhancement Individual level awareness,

Business Correspondent
Credit: agricultural, allied
and non-farm activities;
loans for housing, water &
sanitation, vocational
training
Insurance for lives and
livelihoods – health, crop,
livestock, micro-enterprise
assets
through increase in yields or skill and entrepreneurship
reduction in costs. development, building
solidarity and trust.
Risk mitigation (other than Formation of groups,
insurance) – such as federations, co-operatives,
livestock vaccination mutual benefits, etc., of
producers.
Local value addition Accounting and
through processing – management information
such as cotton ginning or systems, using IT
milk chilling.

Money transfer, for migrant Alternate Market linkages - Building collaborations to

workers and Micro-
pensions
Warehouse receipts
Input supply, output sales
deliver a wide range of
services
Diversification from farm to Sector and Policy work –
allied and non-farm activity analysis and advocacy for
changes/reforms.

The rationale behind the Livelihood Triad strategy is as follows: Micro-credit by itself is helpful
for the more enterprising poor people in economically dynamic areas. Less enterprising poor
households need to start with savings and insurance before they can benefit from micro-credit,
because they need to cope with risk. However, in backward regions, poor people, in addition to
microfinance, need a whole range of Agricultural/ Business Development Services (productivity
enhancement, risk mitigation, local value addition, and market linkages) need to be provided. To
offer these services in a cost-effective manner, it is not possible to work with poor households
individually and they need to be organized into groups, informal associations and sometimes
cooperatives or producer companies. The formation of such groups and making them function
effectively, requires institutional development services. Hence, BASIX adopted the Livelihood
Triad strategy.

26
27
Technology Assisted Financial Inclusion by BASIX

BASIX has initiated single-window provision of comprehensive financial services to the poor
under the Business Correspondent framework. Due to regulatory restrictions, it was earlier not
possible to provide saving and remittance services to poor

Vidhya Samruddhi - An Educational Loan Product :

The primary objective is to enhance human resources by funding higher studies and skill-training
to the candidates belonging to rural and semi urban areas, who are economically backward and
who do not have formal access to nationalized and private banks. Hence, they are deprived of
opportunity that could benefit them and society at large

BASIX Academy :

The primary objective is to enhance human resources by funding higher studies and skill-training
to the candidates belonging to rural and semi urban areas, who are economically backward and
who do not have formal access to nationalized and private banks. Hence, they are deprived of
opportunity that could benefit them and society at large.

Strategy for livelihood promotion:

the Livelihood Triad strategy entails integration of livelihood promotion services with financial
services. The BASIX structure has supported considerable experimentation and innovation –
both in the design of financial
services (credit and insurance) and in identifying opportunities and solutions for Ag/BDS. As
Ag/BDS becomes more integrated with financial service delivery, a challenge will be to ensure
livelihood promotion services are effective for different market segments. Currently services are
packaged with the financial

28
product and are assumed to be required, which is not necessarily the case (e.g. where there is
access to NGO dairying support). Reaching services to more remote areas (more difficult, but
probably more necessary) will also require a specific strategy.

Staff:

Strong systems for staff training and development. Staff are proud to be a part of BASIX, and
see themselves as leaders in livelihood finance. Turnover is nevertheless high, as in other MFIs
facing competition for employment largely from the formal banking sector – ‘staffing the sector’
as BASIX sees it.

MIS:

BSFL has a strong computerised MIS with some social profiling (caste and women) based on
loan ID. BSFL needs to use a unique client ID for social analysis, (tracking over time, client
retention). Analysis of exit or rate of dropout is a gap which BSFL needs to address, allowing for
expected periods between loans, especially for seasonal agricultural loans. BSFL may consider
including in its MIS other client profile indicators from the loan application form, which are used
for credit appraisal but not collated.

Micro credit for water & sanitation - Indian Grameen Services and WaterPartners
International (WPI - USA) had entered into an agreement for collaboration in the water credit
initiatives of WPI, for providing loans for water and sanitation facilities to households and
communities in India through a micro-credit approach. Under this agreement, IGS has accepted
in designing a micro credit product for offering to the poor households and pilot the product in
three locations in India. These locations are Indore (Madhya Pradesh), Delhi and Ganjam district
(Rural) in Orissa state.

This project has the objective of testing the technical and financial feasibility of WatSan loans. A
pilot project has been designed by IGS in order to test the new product. As of now, 389 clients
have been covered with this loan – the amount disbursed is Rs. 4 million.

SOCIAL PERFORMANCE REPORTING AWARD

BASIX has been recognized globally for its Social Performance! BSFL was granted with the
2009 MFI Gold Certificate Social Performance Reporting Award.

The initiative was launched by CGAP, together with its partners the Michael & Susan Dell
Foundation, the Ford Foundation, and the Social Performance Task Force (SPTF). The Award,
powered by the MIX, is designed to promote greater transparency in the MFIs’ Social
Performance Management and looks at the Social Indicators such as Social Mission and Goals,
Social Responsibility, Poverty Assessment, Outreach to Women, Poor and Disadvantaged. The
Award was presented and handed over to Rama Kandarpa (Group President OLE) by Kate
McKee (Senior Adviser for Policy, Outreach and Aid Effectiveness for CGAP) on October 26th
during the Microfinance India Summit at the end of the plenary session on Responsible Lending
chaired by Vijay Mahajan.
29
 VALUES

BASIX is deeply committed to promoting livelihoods for the poor, and have a strong concern for

 equity – working with the rural and urban poor

 sustainability – both financial and institutional for BASIX and also for its customers and
for the environment
 results – making things happen on the ground as well as scale up directly and indirectly
through influencing others including government policy and programs
 integrity and dignity – ensuring these for those who we work with and those who work in
BASIX
 Innovation and learning - devising new ways of doing things and mastering those

30
VISION

The logo depicts the vision of BASIX. Inspired by the Yin-Yang duality, the logo has broadly
the following meaning.

The circle represents the globe, our mother Earth, half of which is dark blue, representing poor,
who are excluded from opportunities for better livelihoods. The white dot in the dark region
represents an area of hope, arising from the talents and aspirations of the poor and the efforts of
BASIX to promote livelihoods.

The white part is the economically more prosperous world, but colourless, and it can benefit
from the vibrancy and talents of the dark blue part. The lines represent BASIX attempts to
establish linkages between the two zones. These linkages include capital, human resources,
technology, markets, institutions and policies. The environment is represented by the circular
boundary, which also depicts the Earth. Anything that we do to enhance prosperity (Samruddhi),
has to be sustainable for both zones together.

Our motto, “Equity for Equity” means that BASIX attempts to use capital (financial, human,
social and natural capital) to work towards bringing equality of opportunity and social justice in
society, globally

Bankers and partners of BASIX

 SWISS AGENCY FOR DEVELOPMENT CORPORATION, SWIZERLAND

 FORD FOUNDATION, USA
 CORAD, NETHERLAND
 DEVELOPMENT INTERNATIONAL DESJARDIANS, CANADA
 WATER PARTNERS INTERNATIONAL, USA
 AXIS BANK Ltd.
 S.I.D.B.I.
 CITIBANK
 CORPORATION BANK LTD.
 HOUSING DEVELOPMENT FINANCE CORPORATION
 HDFC LTD

31
 Senior management group profile of basix

1. s. ramachandran chief operating officer of bsfl

2. d.sattaiah group vice president, hrd
3. s.amarnath group vice president, agbds
4. rama kandarpa vice president, institutional development services,
basix
5. hemanth ku.valveker - chief operating officer
6. George v.mathew assistant general manager(operation and hr) inkbs
lab
7. Subhash ch. Jindal assistant vice president,
Bhopal
8. Sourindra bhattacharjee –
9. Suresh ch. Sharama- assistant dean,
liovelihood school
10.Vigyan vikram singh- AVP, rajasthan
11.p.narsingh
12.Rajeev kumar gupta AVP,ids and
policy work
13.s.r.suryanarayana AVP, internal audit
14.basil liongs AVP, southern ap and
karnatak
15.k. venkata rao AVP,livelihood
triad fund
16.a gopalkrishna
17.p.d.rai chief of basix operations in north
esast india
18.anoop kaul senior advisor,
livelihoods
19.mihir sahana-
20.b.v. raghuram –
21.l.ram mohan rao
22.dr. narayana S L
23.arijit dutta
24.Yves lafond
25.Prabhat panda

32
 Whilst there is reference to the BASIX group, the focus of this rating is
Bharatiya Samruddhi Finance Ltd (BSFL) which provides varied credit products, a range of
insurance linkages, agriculture/business development services and institutional development
services for producer groups and associations. BSFL has expanded operations both in the south,
and more recently to the north of the country. As of end March 2007, working in seven States,
with 198,300 clients, BSFL is among the ten largest MFIs in India.

Strengths

Strong spirit of mission across the organisation, and good understanding of the integrated
service approach (Livelihood Triad strategy);

Operations primarily in economically backward districts;

Wide range of financial products and services designed to cater to different market segments;
regular mechanisms for product testing and market feedback;

Culture of learning and experimentation for both financial and livelihood promotion services
and issues, combined with practical and sustainable systems;

Synergies for experimentation in new initiatives and transfer
within the BASIX group.

Issues

Within an approach which has the broad aim of contributing to development, BSFL may
consider more specifically (‘SMARTLY) how inclusive of the poor and of women it aims to be,
and who it means by ‘poor’;

No tracking or analysis of exit/dropout;

Ag/BDS services appear supply driven in some areas: how to cater specifically to poorer
clients; and focus on areas with greater need (without existing services – as in dairying);

MIS to enable portfolio analysis from social perspective – need to analyse data based on client
ID;

Despite fairly transparent systems and written communication, client awareness appears low;

Internal research needs better coordination and focus.

33
NABARD Initiative in Micro Finance Introduction

National Bank for Agriculture and Rural Development (NABARD) was established as
an apex rural development bank in the year 1982, through an Act of Parliament, to provide
refinance for agriculture, allied activities, small scale industries, cottage and village industries,
rural artisans and crafts in an integrated manner. Earlier, RBI and GOI managed the loans and
credits for the poor but, these bodies wanted some other body which fully managed this
activities i.e. distribution of loans and credits to the poor people. It was set up with an initial
capital of Rs 100 crore, which was enhanced to Rs 2,000 crore, fully subscribed by the
Government of India and the RBI. The bank's vision is "to facilitate sustained access to financial
services for the unreached poor in rural areas through various microfinance innovations in a
cost effective and sustainable manner."

Role of NABARD
 Providing refinance to lending institutions in rural areas.
 Bringing about or promoting institutional development.
 Evaluating, monitoring and inspecting the client banks.

Besides this pivotal role, NABARD also:

 NABARD is an apex institution accredited with all matters concerning policy, planning
and operations in the field of credit for agriculture and other economic activities in rural
areas.
 It is an apex Refinancing agency for the institutions providing investment and
production credit for promoting the various developmental activities in rural areas
 It prepares, on annual basis, rural credit plans for all districts in the country; these plans
form the base for annual credit plans of all rural financial institutions.
 It undertakes monitoring and evaluation of projects refinanced by it.
 It promotes research in the fields of rural banking, agriculture and rural development

34
 

From the above chart we can see the organizational structure of NABARD. In that there are
Board of Directors and the Current Chairperson (Ranjana Kumar) and four Executive Directors
(V S Das, Prakash Office Bakshi, S K Mitra and). There are 24 Head Office Dept., 8 Training
Establishment and 28 Regional Offices and Regional Offices there are Sub Office and 391
District Offices

35
Financial Santa Clause (NABARD)

National Bank for Agriculture and Rural Development (NABARD) was established as an
apex rural development bank in the year 1982, with the initial capital of Rs 14000 crore, which
was provided by the Government of India (GOI) and Reserve bank of India (RBI). And till
March 30, 09 it reached to Rs 1, 00,000 crores with the surplus of Rs 1400 crores. NABARD
gets fund from the GOI, RBI, Swiss Bank, big NGO‘s etc. NABARD‘s financial position is very
robust. Its Reserve and Surplus increased by 10.26% from 07 to 08, and its Cash and Bank
balance and Investment increased by 40.16% and 15.5%. So this shows that how well NABARD
is managing their funds and how year and year it blossomed.

How NABARD helps Banks and MFI’s in augmenting?

Earlier Banks and MFI‘s both were having different approached to work. If one was moving in
right direction then other was in left. So NABARD played a very crucial role to bring them both
in the way. Big commercial banks were focused on only large and medium class people where
the poor were neglected because of less savings and borrowing capacity. And the on the other
hand MFI‘s were focusing on poor women. As there are more Banks then the MFI‘s, so the large
chunk of population gets neglected. So the NABARD came into the picture and try to bridge the
gap between the two. What are the techniques that NABARD use for the Banks and MFI‘s:-

For banks:

Provide Refinance to the banks.

Conduct the workshop where the executive of the NABARD meet the executive and employees
of different banks and help them to understand the need and importance of microcredit to the
poor people.
NABARD helps the banks to interface or try to convene the NGO‘s and other institutions with
the banks which earlier they were avoiding to meet.
NABARD‘s is having rule for the banks that they have to keep aside a certain amount of loan for
the people of Below Poverty Line.

For MFI’s:

NABARD gives loans to the MFI‘s after analyzing there rating and balance sheet.
Conduct the workshop where the executive of the NABARD meet the executive and employees
of different Banks and MFI‘s and bring them together on the same podium.
NABARD gives the refinance to the MFI‘s also.

36
How NABARD manage their Repayment ratio?

It‘s very interesting o know the repayment structure of the NABARD. NABARD provides the
loan to the MFI‘s, Banks, Agriculture loan, other microcredit loan etc. at a very nominal rate of
interest and without any deposit of collateral. But their Repayment ratio is more than 95%, let‘s
see what are the reasons and how it manage such a high repayment ratio:
Before providing loan to the institutions NABARD see the credit rating of that institute given by
the rating agency. If they find that sufficient they grant according to that.

NABARD analyze the balance sheet and profit and loss statement of the borrowing institutes.
They (NABARD) sees the past record of the borrowing institutes i.e. there repayment ratio, there
schemes, there management and the executives who are working in that institutes.

How NABARD gives loan to the Institutions?

While I was doing survey what I found out that, NABARD follows the very strange way of
providing the loans. They give loans to the every ODD number people or institutes i.e.3, 5, 7,
9…. Because there are so many borrowers every day that its difficult to provide to each and
every one. So in this way they try to eliminate the overcrowding problem.

Credit institutions as a Political tool : Debt relief in India

Rural financial institutions that are associated with governments often become the target of
politicians. Indian Government appointed Agricultural Credit Review Committee in 1989. During
the election years, and even at other times, there is a considerable propaganda from political
platforms for postponement of loan recovery or pressure on the credit institutions to grant
extension or waive of the loans.

The ―willfulǁ defaulters are, in general, socially and politically important people who example
others are likely to follow. The waiver of farm loans by the government of India has resulted in
increased defaulters.

Paying back the loan is a cultural concept. People borrowing money should feel the strong moral
urge to pay the loan back. Loan waivers instead make them feel that if the things go really, really
bad, government will step in and cancel the interest payable and even principle also. This will
increase the defaulters list because even the decent borrowers default on their loan.

In addition to know lacuna in the operating system for microfinance, the most serious against
the success of Microfinance, emerges from political intervention.
For example: around the year 1995, at the behest of Mr. Devilal the government of India waived
the repayment of agriculture loans, in which the outstanding debit amount was less than Rs
10,000 per loan account. It was noticed in the RBI inspection of some of the District Central Co-
37
0perative Banks (DCCBs) during the latter years that hundreds in thousands of defaulters with
outstanding Dr Balance in excess of Rs 10,000 were also accommodated by some accounting
jugglery. Be whatever it may, such declaration from the government obviously prompts the
emergence of willful defaulters.

In other words the farmers, where otherwise having financial means to repay choose the easier
path of non repayment. Ultimately it is resulted into mounting NPAs in the balance sheet of the
co-operative banks and more seriously dreadful challenge to the functioning of Microfinance.

This sad experience is recently repeated when an enormous package of Rs 60,000 crore is
declared by Shri P.Chitambaram and further package of Rs 40,000 crore is also declared by Mr.
Rahul Gandhi. This proves that the politicians were in powered have no respect to create and
solitude a noble and viable financial system, such as Microfinance.

Such a culture will seriously impact the MFI‘s operating in the rural areas. The farmer, whose
agriculture loan from the state owned bank was waived, will have a wife which is the ideal
candidate for taking loan from MFI‘s. Now would be her attitude to paying the loan back, when
her husband‘s loan get waived by the Government itself? Because of this attitude many MFI‘s
reluctant to enter into this sector (Farm loan sector). As long as Government persists, privately
funded MFI‘s should never lend any money to the farmers.Indeed the recent waiver packages are
declared by the ruling party to enrich the balance their Vote bank account in view of the general
elections.
Loan waiving policy has any positive impact on distressed farmers who have moneylender
debt?

This loan waiver does not directly address moneylender debt, and I saw somewhere that three
quarters of the farmers committing suicides owed money to moneylenders. There are about 70%
of the poor who still takes the loan from the money lenders and the loan waiving was not for that
people who has taken loan from the moneylenders, so there would be not any relief for such
farmers, and still the suicides will continue. “I am confused, where is my Microfinance Lost”

Product Design

The starting point is: how do MFIs decide what products 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, 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, MFI‘s 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, and how did
they come to those conclusions? Would their clients be willing to pay more for greater benefits?
From price, the logical next set of questions involves efficiency. Indeed, given the relative high
costs of delivering large volumes of small policies, maximizing efficiency is a critical strategy to

38
ensuring that the products are affordable to the low-income market. One way is to make the
products mandatory, which increases volumes, reduces transaction costs and minimizes adverse
selection. What does an organization lose by offering mandatory insurance, and how does it
overcome the disadvantages? MFI‘s can combine a mandatory product with some voluntary
features to make the service more customer-oriented while.

Techniques of Product Design

 To design a loan product to meet borrower needs it is important to understand the cash
pattern of the borrowers. cash pattern is important so far as they effect the debt capacity
of the borrowers.
 Lenders must ensure that borrowers have sufficient cash inflow to cover loan payments
when they are due\
 Efficiency depends less on the delivery model than on the simplicity of the product or
product menu.
 Simple products work best because they are easier to administer and easier for clients to
understand.
 Another efficiency strategy is to use technology to reduce paperwork, manual processing
and errors.
 MFIs need to conduct a costing analysis to determine how much they need to earn in
commission to cover their administrative expenses.

How mfi’s manage their repayment and risk management?

Risk is an integral part of financial services. When financial institutions issue loans, there is a
risk of borrower default. When banks collect deposits and on-lend them to other clients (i.e.
conduct financial intermediation), they put clients‘ savings at risk. Most MFIS‘s provides the
loans without or with smaller portion of deposit or, so for them repayment of interest or principal
is very risky. All MFI‘s face risks that they must manage efficiently and effectively to be
successful. When poorly managed risks begin to result in financial losses, donors, investors,
lenders, borrowers and savers tend to lose confidence in the organization and funds begin to dry
up. When funds dry up, an MFI is not able to meet its social objective of providing services to
the poor and quickly goes out of business.

What is Risk Management?

Risk management is a discipline for dealing with the possibility that some future event will cause
harm. It provides strategies, techniques, and an approach to recognizing and confronting any
threat faced by an organization in fulfilling its mission. Risk management may be as
uncomplicated as asking and answering three basic questions:
What can go wrong?
What will we do (both to prevent the harm from occurring and in the aftermath of an "incident")?
If something happens, how will we pay for it?
39
Benefit of Risk Management:

Early warning system for potential problems: A systematic process for evaluating and measuring
risk identifies problems early on, before they become larger problems or drain management time
and resources. Less time fixing problems means more time for production and growth.

Better information on potential consequences, both positive and negative. A proactive and
forward-thinking organizational culture will help managers identify and assess new market
opportunities, foster continuous improvement of existing operations, and more effectively
performance incentives with the organization‘s strategic goals.

Encourages cost-effective decision-making and more efficient use of resources

The Corposol/Finansol Crisis

In 1996, Finansol, a regulated financial intermediary in Columbia, suffered from severe

deterioration of its loan portfolio. While a lack of transparent and separate accounting from its
parent NGO, Corposol, added to the problem, the MFI‘s rapid growth and poor risk management
were initial culprits. In 1995, Finansol‘s microfinance portfolio grew from $11 million to $35
million. Many of the credit officers who delivered this growth were new and not well trained,
and were simultaneously responsible for promoting three new untested microfinance products for
Corposol. There was no mechanism to prevent clients from receiving multiple loans from the
MFI; in fact, many clients had two to three loans outstanding. The new products were mostly
unsuccessful and the management information system had difficulty managing the diversity of
products. As a temporary measure to reduce the negative impact on the income statement
resulting from provisioning, Finansol refinanced loans on a wide scale and extended loan terms.
This further concealed Finansol‘s deteriorating asset quality. Under pressure to generate revenue
for Corposol, whose operating revenues were heavily dependent on training fees from new
clients, loan officers continued to expand their loan portfolios by adding new clients without
much regard for credit risk. To circumvent a government policy that limited the asset growth of
regulated financial institutions to 2.2 percent per month, Corposol retained a significant portion
of Finansol‘s loan portfolio on its balance sheet, which further distorted Finansol‘s financial
statements. It wasn‘t until July 1995, when ACCION International conducted a formal evaluation
of the entire microfinance operation that the problem came to light. A recapitalization plan called
for an end to the relationship between Corposol and Finansol and the recruitment of new
investors to raise the level of capital high enough to meet the Superintendence‘s requirements
and to fuel future growth. With the assistance of private and non-profit sectors, the recovery plan
successfully saw Finansol through its institutional metamorphosis into what is now
FINAMERICA, S.A. FINAMERICA began operations in 1997, and as of year-end 1998, it had
achieved financial solvency with 9,800 active clients and a loan portfolio of $13.4 million.

40
This crisis demonstrates the need to integrate risk management in all an MFI’s activities.

Major Risks to Microfinance Institutions:

Financial risk Operational risk Strategic risk

i. Credit risk i. Transaction risk i. Governance risk

 Transaction risk  Human resource risk  Ineffective risk

 Portfolio risk
 Information &  Poor governance risk
ii. Liquidity risk technology risk
ii. Reputation risk
iii. Market risk ii. Fraud(integrity) risk
iii. External business
 Interest rate risk iii. Legal & compliance risks
risk
 Foreign exchange risk  Event risk

 Investment portfolio
risk

These are the most significant risks (with the most potentially damaging consequences for the
MFI), how they interact, and current challenges faced by MFIs.

Financial Risks:

Most MFIs focus on financial risks, including credit, liquidity, Interest rate, and investment risks.
Mentioned under are the risks which are very critical for the MFI‘s.

Credit risk:
Credit risk, the most frequently addressed risk for MFIs, is the risk to earnings or capital due to
borrowers‘ late and non-payment of loan obligations. Credit risk encompasses both the loss of
income resulting from the MFI‘s inability to collect anticipated interest earnings as well as the
loss of principle resulting from loan defaults. Credit risk includes both transaction risk and
portfolio risk.

 Transaction risk:
Transaction risk refers to the risk within individual loans. MFIs mitigate transaction risk through
borrower screening techniques, underwriting criteria, and quality procedure for loan
disbursement, monitoring, and collection.
 Portfolio risk:

41
 Portfolio risk refers to the risk inherent in the composition of the overall loan portfolio. Policies
on diversification, maximum loan size, types of loans, and loan structures lessen the portfolio
risk.

Liquidity risk:
Liquidity risk is the ―risk that an MFI cannot meet its obligations on a timely basisǁ. Liquidity
risk usually arises from management‘s inability to adequately anticipate and plan for changes in
funding sources and cash needs. Efficient Liquidity Management requires maintaining sufficient
cash reserves on hand (to meet client withdrawals, disburse loans and fund unexpected cash
shortages) while also investing as many funds as possible to maximize earnings. Liquidity
management is an ongoing effort to strike a balance between having too much cash and too little
cash.

Interest rate risk:

Interest rate risk is the risk of financial loss from changes in market interest rates. The greatest
interest rate risk occurs when the cost of funds goes up faster than the financial institution can or
is willing to adjust its lending rates.

How to manage interest rate risk?

 To reduce the mismatch between short-term variable rate liabilities and long-term fixed
rate loans, managers may refinance some of the short-term borrowings with long-term
fixed rate borrowings. This might include offering one and two-year term deposits as a
product and borrowing five to 10 year funds from other sources. Such a step reduces
interest rate risk and liquidity risk, even if the MFI pays a slightly higher rate on those
funding sources.

 To boost profitability, MFIs may purposely ―mismatchǁ assets and liabilities in

anticipation of changes in interest rates. If the asset liability managers think interest rates
will fall in the near future, they may decide to make more long-term loans at existing
fixed rates, and shorten the term of the MFI‘s liabilities. By lending long and borrowing
short, the MFI can take advantage of the cheaper funding in the future, while locking in
the higher interest rates on the asset side. In this case, the MFI has increased the interest
rate risk in the hope of improving the profitability of the bank.

Operational Risks:

Operational risk arises from human or computer error within daily service or product delivery.
This risk includes the potential that inadequate technology and information systems, operational
problems, insufficient human resources, or breaches of integrity (i.e. fraud) will result in
unexpected losses.

Two types of operational risk:

Transaction risk and fraud risk:

42
  Transaction risk: Transaction risk is particularly high for MFIs that handle a high
volume of small transactions daily. Since MFIs make many small, short-term loans, this
same degree of cross-checking is not cost-effective, so there are more opportunities for
error and fraud. As more MFIs offer additional financial products, including savings and
insurance, the risks multiply and should be carefully analyzed as MFIs expand those
activities

 Fraud risk: Fraud risk is the risk of loss of earnings or capital as a result of intentional
deception by an employee or client. The most common type of fraud in an MFI is the
direct theft of funds by loan officers or other branch staff. Other forms of fraudulent
activities include the creation of misleading financial statements, bribes etc.

How to minimize fraud risk?

 Introduced an education campaign to encourage clients to speak out against corrupt staff
and group leaders.
 Standardized all loan policies and procedures so that the staff cannot make any decision
outside the regulations.
 Established an inspection unit that performs random operational checks.

Strategic Risks:

Strategic risks include internal risks like those from adverse business decisions or improper
implementation of those decisions, poor leadership, or ineffective governance and oversight, as
well as external risks, such as changes in the business or competitive environment. This section
focuses on two critical strategic risks: Governance Risk, Business Environment Risk.

Governance risk:
Governance risk is the risk of having an inadequate structure or body to make effective
decisions. The Corposol/Finansol crisis, described above illustrates the dangers of poor
governance that nearly resulted in the failure of that institution.

External business environment risk:

Business environment risk refers to the inherent risks of the MFI‘s business activity and the
external business environment. To minimize business risk, the microfinance institution must
react to changes in the external business environment to take advantage of opportunities, to
respond to competition, and to maintain a good public reputation

Why micro finance provides loan to the women only?

A majority of microfinance programs generally target women—often more financially

responsible at repaying than men—as clients, providing them with direct control over resources.
Why MFIs typically targeted women. These factors included:
Repayment rates are higher than men, so lending to women is a better Investment.
Women are on average poorer than men, so focusing on women can help achieve poverty targets.
43
Women‘s activities contribute to a community‘s economic growth, so lending to women is more
efficient.
The members in a group are selected so as to be in the same age group and residing in the same
locality being friends but not from family. In case of problems in recovery from even one of the
members, the system of joint liability ensures recovery of the dues from all the members within a
group.
Women are better borrowers because they repay their loans more faithfully than men repay and
tend to spend money on improving the standard of living of their family.
It has been proved that women are those who are the most able to manage the money of the
household. Experience has shown that women are a good credit risk, and that women invest their
income surround the well being of their families.
Women have proven to be the best poverty fighters. Experience and studies have shown that they
use the profits from their businesses to send their children to school, improve their families‘
living conditions and nutrition, and expand their businesses.
By providing access to financial services only through women—making women responsible for
loans, ensuring repayment through women, maintaining savings accounts for women, providing
insurance coverage through women—microfinance programs send a strong message to
households as well as to communities.

Why MFI’s being criticized for providing loans to the women only?

It was found that while women were getting the loans, a "significant portion" of those loans are
directly invested by male relatives (although women bear the liability for repayment)
Only 37% of the cases had women retained full or significant control over the businesses that
were in their names.
Repayment tensions in other microfinance programmes as well. In India in 2008 in the state of
Andhra Pradesh, media reports linked to 70 suicide deaths to repayment issues in Grameen type
programmes. The same reports also documented techniques forcing credit circle members to
stand in the sun until recalcitrant members paid up, verbal abuse etc.
One more reason why MFI‘s critized for giving loans to the women only because, women‘s are
weak compared to men‘s and by coerce them the MFI‘s can easily repayment their loans.
Another reason might be that the women not often change their whereabouts, because they have
the many responsibilities like children etc. and they easily found at home also.

how the recent slowdown affects the mfi’s:

Microfinance institutions have weathered the global financial storm remarkably well, but in 2009
the credit crunch and global recession could hit the sector hard. The micro finance sector is not
fully integrated into mainstream banking and so MFIs are partially insulated from financial
markets contagion. From the very early of beginnings, the sector has expanded into a global
community of over 3000 MFIs serving 125 to 150 million customers in developing countries
with 25 to 30 billion dollars in loans. The industry has consequently attracted mainstream banks
like Citigroup, Standard Chartered, and BNP Paribas. SKS Microfinance, India's largest MFI,
recently raised about 75 million dollars from private equity sources. The most immediate worry
44
is that the global credit crunch will affect the cost and availability of funding. The most
vulnerable MFIs will be those that get their money from foreign banks. Credit is now tighter,
slower, and more costly. As financial institutions are struggling with their liquidity, they have
less money to lend to microfinance institutions, which in turn means less to lend to the poor, and
lending happens then at the higher rate. Current slowdown also increases the rate of interest on
borrowed sum, this further increases the funding loan of the MFI‘s and the poor people who
takes loan from the MFI‘s, would find it difficult to borrow and this further increases the more
people Below Poverty Line (BPL) Microfinance institutions generate capital from three main
sources: debt, deposits, and equity. And during the recession all this sources of finance gets
expensive. We will see one by one.

Deposits:

Many MFI‘s main source of capital is from deposits, and this is the easiest source of capital but
during the recession, local currencies in developing countries lose value, clients will find it
increasingly difficult to maintain savings levels. Deposits may decline and non-performing loans
may increase as clients require additional capital to cover basic needs.

Debt –based MFI’s:

MFIs that depend upon this source of capital at greatest risk during the financial crisis. In
today‘s economy debt financing is offered at a high rate of interest and during slow down the
demand from the investors get reduced and the MFI‘s have the fixed obligation to pay interest.
So this creates the difficulty for the MFI‘s and for borrowers during the time of slowdown.

Equity based financing:

This source of finance is not very popular in India. Because this needs a huge capital and many
MFI‘s in India are not

Many microfinance banks are not disturbed by the global happenings due to, the fact that they all
have high savings- and deposit this leads to less dependence on government, bank and external
funding. But even savings-led institutions are not immune to a global economic crisis. MFI
managers now report that high prices for food and fuel, a lack of demand for microenterprise
products and decrease in the incomes of the earning members are hurting their clients. More and
more clients withdraw their savings or have trouble repaying their loans.

How the MFI’s find opportunities within the crisis:

MFIs could also find opportunities within the crisis. Microfinance‘s relatively reliable business
model could attract investors looking to spread risks and diversify their portfolios.

The downturn could also force MFIs to grow less aggressively and focus on consumer
protection, transparency, and governance.
45
More commercialization by the MFI‘s can also create situation of subprime style crisis. So the
slowdown would slow down the commercialization and helpful for the local borrowers.

One more solution to solve the money problem of MFI‘s might be, to turn MFI‘s into bank, this
can solve their liquidity problem by taking deposits and lending money.

MFI’s being criticized because of high interest rate:

Most MFI‘s financially sustainable by charging interest rates that are high enough to cover all
their costs. The problem is that the administrative costs are inevitably higher for tiny micro
lending than for normal bank lending. Lending out a million dollars in 100,000 loans of $100
each will obviously require a lot more in staff salaries than making a single loan for the total
amount. As a result, interest rates in sustainable microfinance institutions (MFIs) are
substantially higher than the rates charged on normal bank loans. Four key factors determine
these rates:
1. the cost of funds,
2. the MFI's operating expenses,
3. loan losses,
4. and profits needed to expand their capital base and fund expected future growth.

There are three kinds of costs the MFI has to cover when it makes microloans. The first two, the
cost of the money that it lends and the cost of loan defaults, are proportional to the amount lent.
For instance, if the cost paid by the MFI for the money it lends is 10 percent, and it experiences
defaults of 1 percent of the amount lent, then these two costs will total $11 for a loan of $100,
and $55 for a loan of $500. An interest rate of 11percent of the loan amount thus covers both
these costs for either loan. The third type of cost, transaction costs, is not proportional to the
amount lent. Suppose that the transaction cost is $25 per loan and that the loans are for one year.
To break even on the $500 loan, the MFI would need to collect interest of $50 + 5 + $25 = $80,
which represents an annual interest rate of 16 percent. To break even on the $100 loan, the MFI
would need to collect interest of $10 + 1 + $25 = $36, which is an interest rate of 36 percent.
Formula to decide the interest rate is: R = AE + LL + CF + K - II 1 – LL Where AE is
administrative expenses, LL is loan losses, CF is the cost of funds, K is the desired capitalization
rate and II is investment income.

Why Microcredit Rates are so high?

An MFI's main objective is to provide poor and low-income households with an affordable
source of financial services. Interest charged on loans is the main source of income for these
institutions and, because they incur huge costs, the rates are correspondingly high.
Many policy makers question why microfinance interest rates remain high even when MFIs
receive concessional funds to finance lending. Donors provide concessional funds for a 60
particular usage only for a limited period, as do some governments. However, concessional funds
cannot be considered a permanent source of funds for MFIs, and provision must be made through
interest rates to sustain the lenders' operations. The problem is that the administrative costs are
46
inevitably higher for tiny microlending than for normal bank lending. Lending out a million
dollars in 100,000 loans of $100 each will obviously require a lot more in staff salaries than
making a single loan for the total amount. As a result, interest rates in sustainable microfinance
institutions (MFIs) are substantially higher than the rates charged on normal bank loans. Inflation
adds to the cost of microfinance funds by eroding micro lenders' equity. Thus, higher inflation
rates contribute to higher nominal microcredit interest rates through their effect on the real value
of equity. Most of the Micro lenders face two kinds of operating costs: personnel and
administrative. Because micro lending is still a labor-intensive operation, personnel costs are
high. Administrative costs consist mainly of rent, utility charges, transport, office supplies, and
depreciation of fixed assets. Making and recovering small loans is costly on a per unit basis.
Often loan recovery is executed by staffs who visit clients, increasing costs in time taken and
transportation used. Poor physical infrastructure—inadequate road networks, transportation, and
telecommunication systems— in many countries in which micro lenders operate also increases
administrative costs and adds significantly to the cost of microfinance operations. In many
countries in the region, the majority of microcredit is provided by a few leading institutions, and
competition among them is mostly on non-price terms. Large-scale commercial banks with
access to low-cost funds, low operating costs, extensive branch networks, and vast human and
other resources to provide financial services efficiently are presently not significantly involved in
microcredit. The lack of participation of such conventional financial institutions in the
microcredit market also limits potential competition. This does not mean that all high interest
charges by MFIs are justifiable. Sometimes MFIs are not aggressive enough in containing
transaction costs. The result is that they pass on unnecessarily high transaction costs to their
borrowers. Sustainability should be pursued by cutting costs as much as possible, not just by
raising interest rates to whatever the market will bear.

Inappropriate Comparisons

Microcredit interest rates are often compared with those charged by both commercial banks and
excessively subsidized lending organizations. Such comparisons are inappropriate. Commercial
banks most often deal with large loans, and their transaction costs are lower than those of MFIs
on a per unit basis. Thus, commercial banks are able to charge lower interest rates than MFIs. A
financial institution receiving large subsidies may charge lower interest rates than other MFIs. In
Bangladesh, the Grameen Bank charges an annual interest rate of 20% (on a reducing-balance
basis) on its main credit product. Because this rate was below cost recovery levels, the Grameen
Bank incurred losses for many years, and these losses were underwritten by the big subsidies it
received. Thus, Grameen Bank's interest rates should not be compared with those of an MFI that
has not received similar subsidies. Other inappropriate comparisons of MFI interest rates include
those charged by government-owned MFIs or government-sponsored microfinance programs
that are often compelled to charge lower-than-cost-recovery interest rates based on political
considerations. These comparisons also overlook that most of these programs and institutions in
general are unlikely to survive in the long term to serve the poor. Moreover, the poor have to
incur unusually high transaction costs to access credit from these sources due to credit rationing
systems and rent-seeking practices adopted by their employees.

47
Rate Ceilings: Not the Answer -

Lower microcredit interest rates will help increase of availability of affordable finance for poor
households."Policymaker concern over high interest rates has led many to suggest capping
interest rate by setting rate ceilings. Yet that this is not an appropriate solution, explaining "Rate
ceilings will diminishing the growth of the MFI industry and result in reducing the supply of
microcredit and other financial services, harming rather than helping poor and low income
households." If rates are set to a level less than that required to cover costs, lenders will incur
losses. Not only will this hurt MFIs‘ ability to expand operations, but it will also reduce their
creditworthiness and ability to borrow. If a rate ceiling is imposed on a state-owned institution,
government will have to provide funds to cover the resulting losses. If the lenders mobilize
deposit, microcredit interest rate ceilings may decrease the saving with MFI‘s, because ceilings
depress the profitability and viability of MFIs, savers may be reluctant to place deposits in them.
This further increases the funding problem while curtailing a valuable service in demand from
poor and needy clients.

General Impact of Ceilings on Microcredit Interest Rates

The Demand Side Short-Term • Demand for loans increases at the ceiling rate. • Some new
potential clients seek loans at the new rates. • An excess demand for loans created at the ceiling
rate. • Price of credit to some of those who actually get loans reduced. • Some borrowers pay
higher transaction costs than before.
The Supply Side The Demand Side Short-Term Short-Term • Lenders compelled to reduce
their Lending Rates. • Excess demand creates incentives for Rent-seeking among lending staff. •
lending to the poor Reduced. • Lenders' profits on loans to the poor Reduced. • Incentives make
by the MFI‘s on loans to the poor Reduced. • Incentives to increase investments to expand loans
to the poor reduced. • Policy risk on lending to the poor increased (threat of new ceilings). •A
negative signal sent to potential Investors. • Risk of lending to micro lenders Increased. •
Incentives to commercial banks to enter the microcredit market reduced.

SWOT Analysis of micro finance SWOT stands for Strength, Weakness,

Opportunity, and Threat.

Strength
• Helped in reducing the poverty: The main aim of Micro Finance is to provide the loan to the
individuals who are below the poverty line and cannot able to access from the commercial banks.
As we know that Indian, more than 350 million people in India are below the poverty and for
them the Micro Finance is more than the life. By providing small loans to this people Micro
finance helps in reducing the poverty.

48
• Huge networking available: For MFIs and for borrower, both the huge network is there. In
India there are many more than 350 million who are below the poverty line, so for MFIs there is
a huge demand and network of people. And for borrower there are many small and medium size
MFIs are available in even remote areas.

Weakness

• Not properly regulated: In India the Rules and Regulation of Micro Finance Institutions are
not regulated properly. In the absent of the rules and regulation there would be high case of
credit risk and defaults. In the shed of the proper rules and regulation the Micro finance can
function properly and efficiently.

• High number of people access to informal sources: According to the World Bank report 80%
of the Indian poor can‘t access to formal source and therefore they depend on the informal
sources for their borrowing and that informal charges 40 to 120% p.a.

• Concentrating on few people only: India is considered as the second fastest developing
country after China, with GDP over 8.5% from the past 5 years. But this all interesting figures
are just because of few people. India‘s 70% of the population lives in rural area, and that portion
is not fully touched.

Opportunity
• Huge demand and supply gap: There is a huge demand and supply gap among the borrowers
and issuers. In India around 350 million of the people are poor and only few MFIs there to
serving them. There is huge opportunity for the MFIs to serve the poor people and increase their
living standard. The annual demand of Micro loans is nearly Rs 60,000 crore and only 5456
crore are disbursed to the borrower.( April 09)

• Employment Opportunity: Micro Finance helps the poor people by not only providing them
with loan but also helps them in their business, educate them and their children etc. So in this
Micro Finance helping in increase the employment opportunity for them and for the society.

• Huge Untapped Market: India‘s total population is more than 1000 million and out of 350
million is living below poverty line. So there is a huge opportunity for the MFIs to meet the
demand of that unserved customers and Micro Finance should not leave any stones unturned to
grab the untapped market.

• Opportunity for Pvt. Banks: Many Pvt. Banks are shying away from to serve the people are
unable to access big loans, because of the high intervention of the Govt. but the door open for the
Pvt. Players to get entry and with flexible rules Pvt. Banks are attracting towards this segment.

49
Threats
• High Competition: This is a serious threat for the Micro Finance industry, because as the more
players will come in the market, their competition will rise , and we know that the MFIs has the
high transaction cost and after entrant of the new players there transaction cost will rise further,
so this would be serious threat.

• Neophyte Industry: Basically Micro Finance is not a new concept in India, but that was all by
informal sources. But the formal source of finance through Micro Finance is novice, and the
rules are also not properly placed for it.

• Over involvement of Govt.: This is the biggest that threat that many MFIs are facing. Because
the excess of anything is injurious, so in the same way the excess involvement of Govt. is a
serious threat for the MFIs. Excess involvement definition is like waive of loans, make new rules
for their personal benefit etc.

Interview of end users During my personal visit to MFIs I asked view questions from the end
users (customers) of Microfinance institute. I have taken interview of 25 people and I asked few
questions to them. Which are mentioned under:-

Q.1 Are you regular or new customer?

Q.2 If you are a Regular customer, then can you please tell me your experience?
Q.3 What‘s your opinion on interest rates?
Q.4 What you do with that loan amount?
Q.5 Does the Microfinance Institutions provide you any type of other benefits other than just
loan?
Q.6 According to you which is better, loan from local Zamidars or with MFIs?
Q.7 Have you ever faced any violation on you, if you could not able to repay the loan amount?

The common replies are mentioned under:

Ans.1 Many of the customers are regular and take loan frequently.

Ans. 2 This was the best part and I enjoyed and felt good after hearing their answers. I
was amazed that, how can a mere amount of loan can change the life of the people. I got many
50
answers on experiences but the best experience I want to share in this report. There was a
woman; her name was Chandrika Ben Jadwa. I asked her to share her experience before and after
the loan taken from MFIs. She was widow, with 2 daughters. After her husband‘s death she had
taken mere Rs 3000 loan from the MFI and purchased Sewing machine, at that time her daughter
was 13 years old. And now her daughters‘ age is 23. She came with her daughter, her name was
Jaya and when I asked Jaya that what she is doing. I was perplexed by her reply. She replied me
in English, and told that she worked in Baroda at call centre. She was so confident, that I
couldn‘t believe that time. Her mother told that she educated Jaya till 11th at Village schools and
after that she sent her at Baroda for further studies and due to Micro loans, she could able to pay
her tuition fees. From that point I realized that what is the power of Micro loans and how it can
change the life of the individuals. Other experience like increase the living standard of the poor,
improve in health condition etc.

Ans. 3 When I asked them about the interest rate. Then I got the mixed answer. Some
said that rates are high and some said that it is nominal. But one common answer that I found out
that the repayment terms is fair and one can easily understand. Most of the MFIs charges weekly
interest rate, so they said that it is easy to repay them on weekly basis.

Ans.4 Most of the Micro credit borrower uses there loan amount:
 Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding,
widowhood, old age.
 Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or
death.
 Investment Opportunities: expanding a business, buying land or equipment, improving
housing, securing a job (which often requires paying a large bribe), etc.

When I got this type of reply I thought that the villagers and poor people can also manage the
funds as compared to an urban people.

Ans.5 Interviewer answered, that apart from loan amount MFIs helped them many ways
like: health facility, student education, teach them, help them in their business, take care of their
cattle health, sanitation etc.

Ans.6 When I asked this question, 22 people were voted for MFIs and remaining 3 for
local Zamidars. I further asked to that 3 person that why they opted for Zamidars. They replied
that there terms and conditions are much flexible compared to MFIs i.e. they can give interest on
any date. That is after 1 month, 2 month like that, there is not any uniformity in repayment. Other
answer that I got from them that because of the good relation with the Zamidars they preferred to
borrow from them. And the Zamidars charges low rate of interest compared to MFIs. But many
borrowers opted for MFIs because of less rigorous repayment terms and method. Many
additional benefits are given like education, health advice etc. to the borrowers apart from loan
amount.

Ans. 7 There are some cases of violation on the borrowers for not repayment of the
interest and loan amount. One incident discussed with me by the villagers that, there was woman,
her name was Sukhi Devi . She took loan of Rs.10,000 from one of the MFI on a condition of
51
repay 20% annually, but she defaulted and was not able to repay. Actually that loan amount was
taken by her husband, and he died. So she was not able to repay. And the MFI adopted forceful
way to regain their loan amount, and they forced her so much that after sometime she committed
suicide. So according to them (end users) there was only one case where MFI used this forceful
way to regain their amount.

Future of Micro Finance

Microfinance expansion over the next decade can be expected to be an extension of what has
been achieved so far while overcoming the hurdles that have been posing difficulty in effective
microfinance operation and its expansion. There may be several participants in this process and
their participation may be seen in the following forms.
Existing microfinance institutions can expand their operations to areas where there are no
microfinance programs.
More NGOs can incorporate microfinance as one of their programs.
In places where there are less micro finance institutions, the government channels at the
grassroots level may be used to serve the poor with microfinance.
Postal savings banks may participate more not only in mobilizing deposits but also in providing
loans to the poor and on lending funds to the MFIs.
More commercial banks may participate both in microfinance wholesale and retailing. They
many have separate staff and windows to serve the poor without collateral.
International NGOs and agencies may develop or may help develop microfinance programs in
areas or countries where micro financing is not a very familiar concept in reducing poverty.

Considering that the majority of the 360 million poor households (urban and rural) lack access to
formal financial services, the numbers of customers to be reached, and the variety and quantum
of services to be provided are really large. It is estimated that 90 million farm holdings, 30
million non-agricultural enterprises and 50 million landless households in India collectively need
approx US$30 billion credit annually. This is about 5% of India's GDP and does not seem an
unreasonable estimate. However, 80% of the financial sector is still controlled by public sector
institutions. Competition, consolidation and convergence are all being discussed to improve
efficiency and outreach but significant opposition remains. Many private and foreign banks have
unveiled their plans to enter the Indian microfinance sector because of its very low NPAs and
high repayment rate of more than 95% in spite of offering loans without any collateral security.
Microfinance is not yet at the centre stage of the Indian financial sector. The knowledge, capital
and technology to address these challenges however now exist in India, although they are not yet
fully aligned. With a more enabling environment and surge in economic growth, the next few
years promise to be exciting for the delivery of financial services to poor people in India

Development of Small-Scale Enterprises through microfinance will not only increase the
outreach but will also help the generation of more employment and income for the poor. It is
expected that in the following years there will be considerable deepening of microfinance in this
direction along with simultaneous drives to reach and serve the poorest of the poor. But the crux
of the discussion is that, if the over excess involvement of the government would be there in the
Micro Finance sector, than the growth of the Micro Finance won‘t much possible. The Govt.
52
involvement should limited to the important decisions only, but not to interfere in each and every
matter of the management.

Recommendations and suggestions -

1. The concept of Micro Finance is still new in India. Not many people are aware the Micro
Finance Industry. So apart from Government programmes, 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 collaterals.

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.

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.

53
 Conclusion

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 we‘ll 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 mereRs, 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.

54