A

Project Study Report

On
MICRIFINANCE TRENDS & FUTURE IN
INDIA
Submitted in partial fulfilment for the award of
degree of

Bachelor of Business Administration

University of Rajasthan

SUBMITTED TO:

University
Rajasthan

SUBMITTED BY:

of

Anuj Jangid
BBA 4th Sem.
Enroll.No. : 13/961

Apex Institute of Management and Science, Jaipur

(Approved by AICTE, New Delhi & Affiliated to University of Rajasthan, Jaipur)

(2013-2016)

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DECLARATION
I hereby declare that the Project entitled BRAND EXTENTION AND REPOSITIONING
submitted in University of Rajasthan in partial fulfillment for the award of the
Degree of BACHLOR OF BUSINESS ADMINISTRATION under the guidance of
Ms.Sonal Udeshi AIMS is my original material collected by myself. The project has not
previously formed the basis of the award of any other degree , diploma, associate ship,
Fellowship Or other title

Place: Jaipur

Anuj Jangid

Date:

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ACKNOWLEDGEMENT
I express my gratitude to the APEX INSTITUE for giving me the opportunity to
work on the project during our fourth semester of our graduation degree . There are
many who helped me during the project work , and I want to thank them all . My
special thanks to Mrs.Sonal udeshi for their invalueable guidance throughout my project
work and endeavor period has provided me the requisite motivation to complete my
project work successfully. I specially appreciate the help and guidance of all those
teachers who have directly or indirectly helped me making my project a success.

I would like to thank DR. Joytsana Khandelwal ( Deans AIMS ) Jaipur whose constant
guidance and support has led me to complete the project.

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Executive Summary

True Learning Is Born Out Of Experiences And Observations.

Theoretical Study Gives Us The Conceptual Clarity While Practical Study States
About It And How It Can Be Performed In Real Life. Theoretical Study Does Give
Us The Knowledge About Marketing, But Without The Practical Exposure One
Cannot Be Total In The Same Field.
In The Competitive Economy The Quality And The Performance Of The Management
Determines The Success Of The Organization. However The Art And Practice Of
Management Is Quite Different Environment. I Got The Chance To Learn The Various
Aspects Of The World Outside Book That Is So Wide And Expanded. As We Go
Deeper Into, We Find More And More Of It.
The Main Objective Of The Project Is To Develop Knowledge About Succession
Planning And Its Implementation In Business Organizations.

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PREFACE

These projects are necessary part for the fulfilment of BBA Degree course. It helps the
students to gain knowledge about various practical aspects of the Industry or Organization.
In fact, it is the implementation of theory in practice, which is life force of management.I had
privileged of implementing the theory in practice during my project.This project exposed me
to a number of function and activities, which helped me in getting a practical touch of
knowledge.
The main objective of this project is to learn about the concept of MICROFINANCE
TRENDS & FUTURE IN INDIA, and to get the knowledge of change management and
this study helped in providing change management information that can be beneficial both
personally and professionally.

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INTRODUCTION TO MICRO FINANCE

Microfinance is the provision of financial services to low-income clients or
solidarity lending groups including consumers and the self-employed, who
traditionally lack access to banking and related services.
Microfinance is not just about giving micro credit to the poor rather it is an
economic development tool whose objective is to assist poor to work their way out
of poverty. It covers a wide range of services like credit, savings, insurance,
remittance and also non-financial services like training, counselling etc.
Salient features of Microfinance:

Borrowers are from the low income group

Loans are of small amount micro loans
Short duration loans
Loans are offered without collaterals
High frequency of repayment
Loans are generally taken for income generation purpose
Gaps in Financial system and Need for Microfinance

Microfinance is a source of financial services for entrepreneurs and small businesses

lacking access to banking and related services. The two main mechanisms for the
delivery of financial services to such clients are:
(1) relationship-based banking for individual entrepreneurs and small businesses;
and
(2) group-based models, where several entrepreneurs come together to apply for
loans and other services as a group.
In some regions, for example Southern Africa, microfinance is used to describe the
supply of financial services to low-income employees, which is closer to the retail
finance model prevalent in mainstream banking.

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For some, microfinance is a movement whose object is "a world in which as many
poor and near-poor households as possible have permanent access to an appropriate
range of high quality financial services, including not just credit but also savings,
insurance, and fund transfers." Many of those who promote microfinance generally
believe that such access will help poor people out of poverty, including participants
in the Microcredit Summit Campaign. For others, microfinance is a way to promote
economic development, employment and growth through the support of microentrepreneurs and small businesses.
Microfinance is a broad category of services, which includes microcredit.
Microcredit is provision of credit services to poor clients. Microcredit is one of the
aspects of microfinance and the two are often confused. Critics may attack
microcredit while referring to it indiscriminately as either 'microcredit' or
'microfinance'. Due to the broad range of microfinance services, it is difficult to
assess impact, and very few studies have tried to assess its full impact. Proponents
often claim that microfinance lifts people out of poverty, but the evidence is mixed.
What it does do, however, is to enhance financial inclusion.

Microfinance and poverty

Financial needs and financial services
In developing economies and particularly in rural areas, many activities that would
be classified in the developed world as financial are not monetized: that is, money is
not used to carry them out. This is often the case when people need the services
money can provide but do not have dispensable funds required for those services,
forcing them to revert to other means of acquiring them. In their book The Poor and
Their Money, Stuart Rutherford and Sukhwinder Arora cite several types of needs:

Lifecycle Needs: such as weddings, funerals, childbirth, education,

homebuilding, widowhood and old age.

Personal Emergencies: such as sickness, injury, unemployment, theft,
harassment or death.
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Disasters: such as fires, floods, cyclones and man-made events like war or

bulldozing of dwellings.
Investment Opportunities: expanding a business, buying land or equipment,
improving housing, securing a job (which often requires paying a large
bribe), etc.

People find creative and often collaborative ways to meet these needs, primarily
through creating and exchanging different forms of non-cash value. Common
substitutes for cash vary from country to country but typically include livestock,
grains, jewellery and precious metals. As Marguerite Robinson describes in The
Microfinance Revolution, the 1980s demonstrated that "microfinance could provide
large-scale outreach profitably," and in the 1990s, "microfinance began to develop as
an industry".
In the 2000s, the microfinance industry's objective is to satisfy the unmet demand on
a much larger scale, and to play a role in reducing poverty. While much progress has
been made in developing a viable, commercial microfinance sector in the last few
decades, several issues remain that need to be addressed before the industry will be
able to satisfy massive worldwide demand.

The obstacles or challenges to building a sound commercial microfinance industry

include:

Inappropriate donor subsidies

Poor regulation and supervision of deposit-taking MFIs
Few MFIs that meet the needs for savings, remittances or insurance
Limited management capacity in MFIs
Institutional inefficiencies
Need for more dissemination and adoption of rural, agricultural microfinance
methodologies

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A BRIEF ABOUT MFIs

Micro Finance Institutions (MFIs)

Those institutions which have microfinance as their main operation are known as micro
finance institutions. A number of organizations with varied size and legal forms offer
microfinance service. These institutions lend through the concept of Joint Liability
Group (JLG). A JLG is an informal group comprising of 5 to 10 individual members who
come together for the purpose of availing bank loans either individually or through the
group mechanism against a mutual guarantee. The reason for existence of separate
institutions i.e. MFIs for offering microfinance are as follows:

High transaction cost generally micro credits fall below the break-even

point of providing loans by banks

Absence of collaterals the poor usually are not in a state to offer collaterals

to secure the credit

Loans are generally taken for very short duration periods
Higher frequency of repayment of installments and higher rate of Default

Non-Banking Financial Companies (NBFCs), Co-operative societies, Section-25

companies, Societies and Trusts, all such institutions operating in microfinance
sector constitute MFIs and together they account for about 42 percent of the
microfinance sector in terms of loan portfolio. The MFI channel is dominated by
NBFCs which cover more than 80 percent of the total loan portfolio through the
MFI channel.
Sl. No. Type of MFI
Not-for Profit MFIs
1
NGOs
2

Non-Profit companies

Number Legal Registration

400-500 Society Registration Act, 1860
Indian Trust Act, 1882
20
Section-25 of Indian Companies Act,
1956

Mutual Benefit MFIs

3
Mutual benefit MFIs Mutually200-250
Aided
Cooperative
Societies
(MACS)
For Profit MFIs
4
Non-Banking Financial Companies45
(NBFCs)

Mutually Aided Co-operative societies,

Act enacted by State Governments
Indian companies Act, 1956
Reserve Bank of India Act, 1934
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LIST OF MAJOR MICROFINANCE INSTITUTIONS:

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MAJOR SCHEMES OFFERED BY MFIs:

1. GIDKA (Group Insurance Scheme for Khadi Artisan)With a view to provide safe
and secured life to Khadi Artisan a Group Insurance Scheme forKhadi Artisans has
been introduced. The Scheme covers all the spinners, weavers, pre-spinning artisans
and

postweaving

artisans

engaged

in

Khadi

activity,

associated

with

KhadiInstitutions (NGOs) throughout the Country.

2. DRDA (The District Rural Development Agency)The district Rural Development
Agency is visualized as specialized and professional agency capable of managing
the antipoverty Programmes of the Ministry of Rural Development onthe one hand
and to effectively relate these to the overall effort of poverty eradication in the
district.
3. NIRD (National Institute of Rural Development) National Institute of Rural
Development (NIRD) facilitates rural development through government and nongovernmental initiatives. NIRD is the countrys apex body for undertaking training,
research, action and consultancy functions in the rural development sector. It works
as an autonomous organization supported by the Ministry of Rural Development,
Government of India.
4. NRRDA (National Rural Road Development) Construction of rural roads brings
multifaceted benefits to the hitherto deprived rural areas and also an effective
poverty reduction strategy. Pradhan Mantri Gram SadakYojana Awareness of
Schemes and Services of Micro Finance Institutes (PMGSY) were taken up by the
Government of India with an objective to provide connectivity to the unconnected
Habitations in the rural areas.

5. CAPART (Council for Advancement of peoples Action and Rural Technology)

Council for Advancement of Peoples Action and Rural Technology (CAPART) is an
autonomous body registered under the Societies Registration Act, 1860 and is
functioning under the aegis of the Ministry of Rural Development. CAPART is
involved in catalyzing and coordinating the emerging partnership between Voluntary

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Organizations and the Government of India for sustainable development of Rural

Areas.

DRAWBACKS OF MICRO FINANCE

Ills of Micro Finance:
Financial illiteracy
One of the major hindrances in the growth of the microfinance sector is the financial
illiteracy of the people. This makes it difficult in creating awareness of microfinance
and even more difficult to serve them as microfinance clients. Though most of the
microfinance institutions claim to have educational trainings and programmes for
the benefit of the people, according to some of the experts the first thing these SHG
and JLG members are taught is to do their own signature.
The worst part is that many MFIs think that this is what financial literacy means. We
all know how dangerous it can be when one doesnt know how to read but he/she
knows how to accept or approve it (by signing it).
Inability to generate sufficient funds
Inability of MFIs to raise sufficient fund remains one of the important concern in the
microfinance sector. Though NBFCs are able to raise funds through private equity
investments because of the for-profit motive, such MFIs are restricted from taking
public deposits. Not-for-profit companies which constitute a major chunk of the MFI
sector have to primarily rely on donations and grants from Government and apex
institutions like NABARD and SIDBI.
In absence of adequate funding from the equity market, the major source of funds
for MFIs are the bank loans, which is the reason for high Debt to Equity ratio of
most MFIs. MFIs receive debt from banks against their equity and in order to
increase their portfolio size they need to increase their debts for which they further
need to increase their equity. After the Andhra crisis, it is reported that banks have
stopped issuing fresh loans and even though currently few banks have resumed, they
want MFIs to increase their equity to get fresh loans. So the only mode for the MFIs
to increase their portfolio size is to increase their equity.
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Dropouts and Migration of group members

Majority of the microfinance loans are disbursed on group lending concept and a
past record of the group plays an important role in getting new loans either through
SHG-Bank linkage or through MFIs. The two major problems with the group
concept are dropouts (when one or more members leave the group) and migration
(when one or more members move to another group). Most MFIs lend on the basis
of the past record of the group i.e. SHG or JLG and also on the individuals
repayment performance. In absence of a decent past record, members are deprived
of getting bigger loan amounts and additional services.
Transparent Pricing
Though the concern about the transparent pricing in the microfinance sector has
been an older one, it is gaining significance with the growing size and the increasing
competition in the sector. Non-transparent pricing by MFIs confines the bargaining
power of the borrowers and their ability to compare different loan products, because
they dont know the actual price. In absence of the proper understanding of the
pricing, clients end up borrowing more than their ability to payback which results in
over-indebtedness of the borrower. Ambiguity in the pricing by MFIs is inviting
regulatory bodies to implement strict measures like interest rate caps. But simply
putting an interest rate cap may encourage MFIs to look for clients with larger loan
requirements. This may deprive the clients with smaller loan requirements who are
supposed to be the actual beneficiary of microfinance.
Cluster formation fight to grab established market
MFIs drive to grab an established market and reduce their costs is resulting in
formation of clusters in some areas leaving the others out of the microfinance
outreach. By getting an established microfinance market, MFIs reduce their initial
cost in group formation of clients, educating them and creating awareness about
microfinance. This is one of the reasons for the dominance of the microfinance
sector in the southern states. Now the problem is that a similar trend is being

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followed in the northern states as well. We have already seen what happened in A.P
and it seems that most of the MFIs have not taken a lesson from the Andhra crisis.

Multiple Lending and Over-Indebtedness

Both of these are outcome of the competition among the MFIs. Microfinance is one
such sector where the Neo-liberal theory of free market operation fails, at least to
some extent. Though competition is good for many sectors but in this case it is going
against both the parties. In order to eat away each others market share, MFIs are
ending up giving multiple loans to same borrowers which in some cases is leading to
over-indebtedness (a situation where the borrower has taken loans more than her/his
repaying capacity) of the borrower. MFIs are getting affected because borrowers are
failing to make payments and hence their recovery rates are falling, while overindebtedness is making the borrower go to depression and in some cases forcing
them to commit suicide.

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SCOPE AND TRENDS IN INDIA

Microfinance sector has grown rapidly over the past few decades. Nobel Laureate
Muhammad Yunus is credited with laying the foundation of the modern MFIs with
establishment of Grameen Bank, Bangladesh in 1976. Today it has evolved into a
vibrant industry exhibiting a variety of business models. Microfinance Institutions
(MFIs) in India exist as NGOs (registered as societies or trusts), Section 25
companies and Non-Banking Financial Companies (NBFCs). Commercial Banks,
Regional Rural Banks (RRBs), cooperative societies and other large lenders have
played an important role in providing refinance facility to MFIs. Banks have also
leveraged the Self-Help Group (SHGs) channel to provide direct credit to group
borrowers.
With financial inclusion emerging as a major policy objective in the country,
Microfinance has occupied centre stage as a promising conduit for extending
financial services to unbanked sections of population. At the same time, practices
followed by certain lenders have subjected the sector to greater scrutiny and need for
stricter regulation.
This report, which contains only a part of the actual report is based on the research
work done as a part of the summer internship project at Reserve Bank of India,
Kanpur. The research involved study of the past literatures about the microfinance
sector, related online research papers and journals. The study also involved survey of
all MFIs in the state of Uttar Pradesh through field visits and online survey. The
annual reports and the sector reports published by regulatory bodies, MFI
associations and major microfinance players facilitated the study, especially in
understanding the size, growth and past trends. Interactions with some of the
industry experts helped in understanding and analysing the emerging concerns in the
microfinance sector and also to look for some possible solutions.
Although the microfinance sector is having a healthy growth rate, there have been a
number of concerns related to the sector, like grey areas in regulation, transparent
pricing, low financial literacy etc.

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On a national level there has been a spate of actions taken to strengthen the
regulation of MF sector including, enactment of microfinance regulation bill by the
Government of Andhra Pradesh, implementation of sector-specific regulation by
Reserve Bank of India and most recently, release of Draft Microfinance Institutions
(development and regulation) Bill, 2014 for comments.
Based on the research work, a few major recommendations made in the report
include field supervision of MFIs to check ground realities and the operational
efficiency of such institutions. Offer incentives to MFIs for opening branches in
unbanked villages, so as to increase rural penetration. Also MFIs be encouraged to
offer complete range of products to their clients. Transparent pricing and technology
implementation to maintain uniformity and efficiency are among the others which
these institutions should adopt. Inability of MFIs in getting sufficient funds is a
major hindrance in the microfinance growth and so these institutions should look for
alternative sources of funds. Some of the alternative fund sources include outside
equity investment, portfolio buyouts and securitization of loans which only a few
large MFIs are currently availing.
According to the latest research done by the World Bank, India is home to almost
one third of the worlds poor (surviving on an equivalent of one dollar a day).
Though many central government and state government poverty alleviation
programs are currently active in India, microfinance plays a major contributor to
financial inclusion. In the past few decades it has helped out remarkably in
eradicating poverty. Reports show that people who have taken microfinance have
been able to increase their income and hence the standard of living.
About half of the Indian population still doesnt have a savings bank account and
they are deprived of all banking services. Poor also need financial services to fulfill
their needs like consumption, building of assets and protection against risk.
Microfinance institutions serve as a supplement to banks and in some sense a better
one too. These institutions not only offer micro credit but they also provide other
financial services like savings, insurance, remittance and non-financial services like
individual counselling, training and support to start own business and the most
importantly in a convenient way. The borrower receives all these services at her/his
door step and in most cases with a repayment schedule of borrowers convenience.
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But all this comes at a cost and the interest rates charged by these institutions are
higher than commercial banks and vary widely from 10 to 30 percent. Some claim
that the interest rates charged by some of these institutions are very high while
others feel that considering the cost of capital and the cost incurred in giving the
service, the high interest rates are justified
Channels of Micro finance
In India microfinance operates through two channels:
1. SHG Bank Linkage Programme (SBLP)
2. Micro Finance Institutions (MFIs)
SHG Bank Linkage Programme
This is the bank-led microfinance channel which was initiated by NABARD in
1992. Under the SHG model the members, usually women in villages are
encouraged to form groups of around 10-15. The members contribute their savings
in the group periodically and from these savings small loans are provided to the
members. In the later period these SHGs are provided with bank loans generally for
income generation purpose. The groups members meet periodically when the new
savings come in, recovery of past loans are made from the members and also new
loans are disbursed. This model has been very much successful in the past and with
time it is becoming more popular. The SHGs are self-sustaining and once the group
becomes stable it starts working on its own with some support from NGOs
SHG model How it works and institutions like NABARD and SIDBI.
Legal structure and regulation
Although the SHG-Bank linkage model is well managed in India by NABARD, currently
there is no proper regulatory body for the supervision of MFIs. The presence of
institutions with a variety of legal forms makes it difficult for the regulation of all such
institutions by a single regulatory body in the current Indian legal structure. Though
NBFCs, which cover the major part of the outstanding loan portfolio by the microfinance
channel, are regulated by Reserve Bank of India, other MFIs like societies, trusts,
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Section-25 companies and cooperative societies fall outside the purview of RBIs
regulation. The acceptance of the Malegam committee recommendations by the RBI is a
big step forward in addressing the above concern but again it will cover only a section of
the MFIs i.e. NBFCs. The microfinance bill which was introduced in the year 2007 is
still pending. The most recent and the strongest step taken by the government, The Micro
Finance Institutions (Development and regulation) Bill, 2014 is a major step in the
microfinance sector. The proposed bill clarifies all doubts pertaining to regulation of the
MFIs by appointing RBI as the sole regulator for all MFIs.
Financial illiteracy
One of the major hindrances in the growth of the microfinance sector is the financial
illiteracy of the people. This makes it difficult in creating awareness of microfinance and
even more difficult to serve them as microfinance clients. Though most of the
microfinance institutions claim to have educational trainings and programmes for the
benefit of the people, according to some of the experts the first thing these SHG and JLG
members are taught is to do their own signature. The worst part is that many MFIs think
that this is what financial literacy means. We all know how dangerous it can be when one
doesnt know how to read but he/she knows how to accept or approve it (by signing it).
Inability to generate sufficient funds
Inability of MFIs to raise sufficient fund remains one of the important concern in the
microfinance sector. Though NBFCs are able to raise funds through private equity
investments because of the for-profit motive, such MFIs are restricted from taking public
deposits. Not-for-profit companies which constitute a major chunk of the MFI sector
have to primarily rely on donations and grants from Government and apex institutions
like NABARD and SIDBI. In absence of adequate funding from the equity market, the
major source of funds for MFIs are the bank loans, which is the reason for high Debt to
Equity ratio of most MFIs.
MFIs receive debt from banks against their equity and in order to increase their portfolio
size they need to increase their debts for which they further need to increase their equity.
After the Andhra crisis, it is reported that banks have stopped issuing fresh loans and
even though currently few banks have resumed, they want MFIs to increase their equity
to get fresh loans. So the only mode for the MFIs to increase their portfolio size is to
Page | 18

increase their equity. The problem of inadequate funds is even bigger for small and
nascent MFIs as they find it very difficult to get bank loans because of their small
portfolio size and so they have to look for other costlier sources of fund.
Dropouts and Migration of group members
Majority of the microfinance loans are disbursed on group lending concept and a past
record of the group plays an important role in getting new loans either through SHGBank linkage or through MFIs. The two major problems with the group concept are
dropouts (when one or more members leave the group) and migration (when one or more
members move to another group). Most MFIs lend on the basis of the past record of the
group i.e. SHG or JLG and also on the individuals repayment performance. In absence of
a decent past record, members are deprived of getting bigger loan amounts and
additional services.
Transparent Pricing
Though the concern about the transparent pricing in the microfinance sector has been an
older one, it is gaining significance with the growing size and the increasing competition
in the sector. Non-transparent pricing by MFIs confines the bargaining power of the
borrowers and their ability to compare different loan products, because they dont know
the actual price. In absence of the proper understanding of the pricing, clients end up
borrowing more than their ability to payback which results in over-indebtedness of the
borrower.
MFIs, in order to make their products look less expensive and more attractive, are
disguising their actual/effective interest rates (better known as the Annualized Percentage
Rates APR) by including other charges like service charge, processing fee etc. Some
MFIs even take interest free deposits for lending microloans. There have been cases
where the interest rates are linked with the loan amount, which means a higher interest
rate for smaller loans (because of higher transaction cost). This is resulting in highest
interest rate being charged to the poorest clients, which contradicts with the social aspect
of microfinance.
Ambiguity in the pricing by MFIs is inviting regulatory bodies to implement strict
measures like interest rate caps. But simply putting an interest rate cap may encourage
Page | 19

MFIs to look for clients with larger loan requirements. This may deprive the clients with
smaller loan requirements who are supposed to be the actual beneficiary of microfinance.
Cluster formation fight to grab established market
MFIs drive to grab an established market and reduce their costs is resulting in formation
of clusters in some areas leaving the others out of the microfinance outreach. By getting
an established microfinance market, MFIs reduce their initial cost in group formation of
clients, educating them and creating awareness about microfinance. This is one of the
reasons for the dominance of the microfinance sector in the southern states. Now the
problem is that a similar trend is being followed in the northern states as well. We have
already seen what happened in A.P and it seems that most of the MFIs have not taken a
lesson from the Andhra crisis.
This cluster formation is restricting MFIs from reaching to rural areas where there is the
actual need for microfinance. People in urban and semi-urban areas are already having
access to microfinance through SHG-bank linkage or individual lending, but in rural
areas people dont have access to banks and so SBLP is not much active in such areas.
Because of the initial cost involved in serving a new location, MFIs are not willing to go
to such remote locations. This is the reason most of the MFIs have their branches in
urban and semi-urban areas only resulting in a very low rural penetration of
microfinance.
It is high time for the MFIs to understand that though microfinance is a resalable
product, increasing the outreach of the microfinance sector by including new clients and
serving new locations is what which is needed the most at the moment.
Multiple Lending and Over-Indebtedness
Both of these are outcome of the competition among the MFIs. Microfinance is one such
sector where the Neo-liberal theory of free market operation fails, at least to some extent.
Though competition is good for many sectors but in this case it is going against both the
parties. In order to eat away each others market share, MFIs are ending up giving
multiple loans to same borrowers which in some cases is leading to over-indebtedness (a
situation where the borrower has taken loans more than her/his repaying capacity) of the
borrower
Page | 20

PRESENT STATUS OF MICROFINANCE IN INDIA

PRESENT STATUS OF MICROFINANCE IN INDIA Microfinance sector has traversed
a long journey from micro savings to microcredit and then to microenterprises and now
entered the field of micro insurance, micro pension. Financial institutions in the country
continue to play a leading role in the microfinance program for nearly two decades now.
They have joined hands proactively with informal delivery channels to give microfinance
sector the necessary momentum. The data for the year 2010-11 along with a few
preceding year have been presented and reviewed under two models of microfinance (i)
SHGBank Linkage model (ii)MFI-Bank Linkage model.

The SHGs-Bank Linkage programme has received wide acceptance among multiplicity
of stake holders, civil society organizations, bankers and the international communities.
Around 1.2 million new SHGs had credit link with banks and bank loans of Rs 14,547
crore (including repeat loan) was disbursed to these SHGs in the financial year 2010-11.
During same period 7.46 million SHGs maintained saving account with banks.

Page | 21

On an average, the amount of saving per SHGs was Rs 9,405.00 as compared to the
amount of credit of Rs 65,180.00 in 2010-11. During the same period 471 MFIs were
provided loans by banks to the tune of Rs 8448 crore. Under the MFI- Bank Linkage
Programme number of MFIs disbursed loans by Banks is less than previous years but
amount of loan is much higher than the previous years.
The growth is also higher than corresponding growth under the SHGs-Bank Linkage
Programme in 2010-11. This is due to proactive role of the MFIs in micro credit and
professional management of funds from banks. A number of field researches have been
conducted by various agencies to study the impact of microfinance on socio-economic
aspects of the clients. These field studies include study commissioned by NABARD in
2002 with financial assistance from SDC where GTZ which covered 60 SHGs in eastern
India. The World Bank Policy Paper details in the findings of Rural Finance Access
Survey (RFAS) done by World Bank in association with NCAER.
The RFAS covered 736 SHGs in the state of Andhra Pradesh and Uttar Pradesh. These
field studies reveal divergent research findings. But the common findings are of the
opinion that there is some increase in income levels and household assets in real terms
among the clients. These studies also brought out the fact that major occupation of group
members was agriculture along with other activities like farm labour and poultry. Being
rain fed area, lack of irrigation facility; declining agricultural outputs and fragmentation
of land have accentuated their vulnerabilities over a period of time.
The growth of microfinance organizations in India has also to be seen in the light of
financial sector reforms in India. Under the new approach, institutional viability is of
prime concern and instruments of directed credit and interest rate directives have been
totally diluted or done away with. As a consequence, banks are increasingly shying away
from rural lending as well as rationalizing their branch network in rural area.
Burgess and Pandey (2004) have brought out this fact in their study by stating that while
between 1977 and 1990 (Pre reform period) more bank branches were opened in
financially less developed states, but the pattern was reversed in post reform period. Thus
the access of the rural poor to credit through traditional bank lending has been reduced in
post reform era. The policy recommendation is to fill up this gap through microfinance.

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FUTURE OF MICROFINANCE IN INDIA

An oft-neglected aspect of emerging economies is the severe poverty that still remains,
and there have been many strategies designed to provide the necessary financial
assistance that can help eradicate third-world living conditions. Originally hailed as a
means of enabling the poor to climb out of poverty, microfinance has come in for
criticism for sucking people into an uncompromising debt market.
In its latest report on the state of the microfinance industry, the Microcredit Summit
Campaign says the goals of funding poor people should be to prevent the vulnerabilities
they are accustomed to. It says: If we want to provide financial services in a way that
helps people move out of poverty, then we need to provide things that cannot be stolen.
We need to provide products and services that help people living in poverty to address
the many areas of vulnerability that they face, so that their hard-earned gains are not
taken away by disaster and disease.
Principles or profiteering
Although the concept of microfinance is rooted in a desire to help provide financial
services to people who would otherwise not be able to access them thereby
empowering them to get out of poverty, as well as promoting better employment,
economic development and growth there has been a debate over whether some
institutions are profiteering from the ignorance of the poor.
Originally developed during the 1970s by Bangladeshi economist Muhammad Yunus and
his Grameen Bank, microfinance was used to help struggling entrepreneurs from the
poorest parts of the world fund projects that would otherwise not get financing from
traditional sources. Yunus received the Nobel Peace Prize for his work, but questions
have been raised in recent years about the rates of interest on loans, a lack of
transparency and the aggressive recovery methods used by providers.
For a country expected to be a global economic powerhouse during the current century,
India is still saddled with a serious disparity in wealth between those at the bottom of
society and the phenomenally wealthy at the top. During the past decade, Indias
microfinance industry was held up as a shining example of how best to help the needy,
but has also been linked to a spate of suicides.
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India is still saddled with a serious disparity in wealth

SKS, at the time Indias largest microfinance company, had a loan book worth $1.2bn. In
July 2014, it went public and, according to The Economist, was 13 times
oversubscribed. In the aftermath of the suicides, the company had to scale back its
operations in the region, cutting 1,200 jobs and shutting 78 branches. As a result, access
to microfinance declined in 2014; the first time this had happened since the Microcredit
Summit Campaign began recording how many clients the industry has.
The groups report said: Most of these reductions come from Andhra Pradesh, where
fast growth led to over lending, cases of harsh collection practices, and heavy regulation
from state government. Many [microfinance institutions] and banks stopped lending to
microfinance clients and self-help groups as a result.
Tighter controls
One of the most contentious areas of microfinance is the level of interest on the loans
borrowers must pay back. During the industrys most bullish period, some providers
charged borrowers as much as 40 percent. In 2014, new regulations were put in place to
prevent these extreme terms, with a cap of 26 percent interest on loans offered by
microfinance institutions.
There is also a limit of 10 percent on the amount lenders can place on top of the rate at
which customers have borrowed the money. KC Chakraborty, Deputy Governor of the
Reserve Bank of India, said the cap was necessary to prevent profiteering: Charging an
interest rate beyond 26 percent from poor people is exploitation.
Another area in which microfinance firms have been criticized is their alleged
application of a one-size-fits-all approach on a national level. Many argue that, for
microfinance schemes to be successful, lenders need to work on a local level, training up
borrowers and helping them understand how best to use their new capital.
Chakraborty believes the countrys microfinance institutions must take this route, saying
they should develop local expertise and scale up locally. They should not scale up
nationally. The Reserve Bank also introduced a licensing system for microfinance
organizations and placed restrictions on lending to people already had outstanding loans.

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Growth prospects
Although the market took a considerable hit from the scandal, as well as 2009s
economic downturn, there are signs it is starting to bounce back. In January, Yunus
Grameen Capital said it had secured $144m of equity for microfinance groups during
2012, more than double the amount in the preceding year.
Even SKS, with a reduced loan book of $325m, managed to raise $47.5m in equity in
2012. The total loan book for Indias microfinance industry is now said to be between
$2bn and $3bn; down on the $5bn before its downturn, but still a considerable amount.
Ultimately, how the industry survives the coming years depends on what strategies are
put in place by regulators to ensure that people are protected from predatory commercial
lenders. Providing the poor with an opportunity to break themselves out of poverty is a
noble ideal, but it must be achieved through proper training, a localised and flexible
strategy, and underpinned by meaningful and tight regulations.
How much longer India will need such a form of lending for the poor is also debateable.
While the country enjoys its newfound status as one of the economic engines of the East,
the disparity between rich and poor is both vast and shameful.
Bringing the poor into the tax system through employment will enhance the countrys
growth prospects, but it should be done in a realistic and sustainable way. It should also
avoid allowing an industry to develop collection tactics that bear worrying similarities to
those of loan sharks.
The caps placed on interest rates implemented in 2014 were necessary, and although
many firms have said the caps are stifling the industrys ability to profit, they should be
maintained to ensure borrowers are not over-extended. Microfinance should be less about
profit and more about helping the poorest in society get on the first step to prosperity.

RECOMMENDATIONS
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1. Proper Regulation:
The regulation was not a major concern when the microfinance was in its
nascent stage and individual institutions were free to bring in innovative
operational models. However, as the sector completes almost two decades of age
with a high growth trajectory, an enabling regulatory environment that protects
interest of stakeholders as well as promotes growth, is needed.
2. Field Supervision:
In addition to proper regulation of the microfinance sector, field visits can be
adopted as a medium for monitoring the conditions on ground and initiating
corrective action if needed. This will keep a check on the performance of ground
staff of various MFIs and their recovery practices. This will also encourage MFIs
to abide by proper code of conduct and work more efficiently. However, the
problem of feasibility and cost involved in physical monitoring of this vast
sector remains an issue in this regard.
3. Encourage rural penetration:
It has been seen that in lieu of reducing the initial cost, MFIs are opening their
branches in places which already have a few MFIs operating. Encouraging MFIs
for opening new branches in areas of low microfinance penetration by providing
financial assistance will increase the outreach of the microfinance in the state
and check multiple lending. This will also increase rural penetration of
microfinance in the state.
4. Complete range of Products:
MFIs should provide complete range of products including credit, savings,
remittance, financial advice and also non-financial services like training and
support. As MFIs are acting as a substitute to banks in areas where people dont
have access to banks, providing a complete range of products will enable the
poor to avail all services.
5. Transparency of Interest rates:
As it has been observed that, MFIs are employing different patterns of charging
interest rates and a few are also charging additional charges and interest free
deposits (a part of the loan amount is kept as deposit on which no interest is
paid).
All this make the pricing very confusing and hence the borrower feels incompetent
in terms of bargaining power. So a common practice for charging interest should be
followed by all MFIs so that it makes the sector more competitive and the
beneficiary gets the freedom to compare different financial products before buying.
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6. Technology to reduce Operating Cost:

MFIs should use new technologies and IT tools & applications to reduce their
operating costs. Though most NBFCs are adopting such cost cutting measures,
which is clearly evident from the low cost per unit money lent (9%-10%) of such
institutions. NGOs and Section 25 companies are having a very high value of
cost per unit money lent i.e. 15-35 percent and hence such institutions should be
encouraged to adopt cost-cutting measures to reduce their operating costs. Also
initiatives like development of common MIS and other software for all MFIs can
be taken to make the operation more transparent and efficient.
7. Alternative sources of Fund:
In absence of adequate funds the growth and the reach of MFIs become
restricted and to overcome this problem MFIs should look for other sources for
funding their loan portfolio. Some of the ways through which MFIs can raise
their fund are:
a) By getting converted to for-profit company i.e. NBFC: Without investment by
outside investors, MFIs are limited to what they can borrow to a multiple of total
profits and equity investment. To increase their borrowings further, MFIs need to
raise their Equity through outside investors. The first and the most crucial step to
receive equity investment are getting converted to for-profit NBFC. Along with
the change in status the MFI should also develop strong board, a quality
management information system (MIS) and obtain a credit rating to attract
potential investors.
b) Portfolio Buyout: It is when banks or other institutions purchase the rights to future
payment stream from a set of outstanding loans granted by MFIs. In such
transactions MFIs are responsible for making up any loss in repayment up to a
certain percentage of the portfolio and this clause is known as first loss default
guarantee. The above clause ensures that the MFI retains the correct incentive to
collect these loans.
c) Securitization of Loans: This refers to a transaction in which the repayments from a
set of microloans from one or more MFIs are packaged into a special purpose
vehicle, from which tradable securities are issued. As the loans from multiple MFIs
can be pooled together the risk gets diversified. Though securitization of loans and
portfolio buyout are similar in many ways like first loss default guarantee clause,
limit to the amount of loans that can be sold off etc. The major difference between
the two is that securitizations require a rating from a credit rating agency and that it
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can be re-sold, which makes securitized loans attract more potential buyers. Also
unlike portfolio buyout, there can be multiple buyers and sellers for each transaction
in case of securitization of loans as compared to single buyer and single seller in
portfolio buyout. Through securitization, MFIs can tap new sources of investments
because fund of certain types like mutual funds, which are barred from directly
investing in MFIs, can invest through securitized loans.

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A FRESH START FOR THE MICROFINANCE IN INDIA

It has been a quiet period for the microfinance sector. While there was much hype about
the microfinance bill, it seems to have fallen by the wayside, at least from legislative
business. The oppressive Andhra Pradesh law continues to be in existence. Microfinance
institutions have reconciled themselves to the new normal, which is reporting their
performance in two parts overall performance and performance outside Andhra
Pradesh.
Some institutions which were deeply invested in Andhra Pradesh have encountered
trouble and are facing bankruptcy. But the bloodbath seems to be over and we may be
ready for a new beginning. That several genuine institutions became collateral damage is
the bad news.
However, there is much good news for the sector. The new governor of the RBI is a
known liberal among conservatives. He signed a letter to the media when the crisis was
at its peak. The letter, signed by many Indian academics teaching at American
universities, called for saving the microfinance sector from the oppressive Andhra act.
Raghu ram Rajan has made his inclinations on the expected roadmap for financial
inclusion clear. This is a significant departure from the traditional position of the RBI,
which has always believed that financial inclusion has to be bank-led.
Rajan believes in the multiplicity of institutions. He argues for specialised institutions to
do specialised jobs. While he does not argue against the obligations to be placed on
banks for priority sector lending targets (which include microfinance as a category), he
does argue for giving them a choice on how to achieve this.
This includes the purchase of priority sector lending notes a tradable paper that
represents the portfolio achieved by somebody beyond their obligations. These notes
could originate from non-banks as well, and is an attractive proposition for MFIs that are
non-banks.

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Rajan has also argued for specialised and regional banks. While these two
MFI applicants for a bank licence might find favour with the RBI if they
pass all the other criteria, others can seek solace in the fact that there
could be more regulatory easing to incorporate financial institutions in a
more centrally regulated banking framework. The recent report by the
Nachiket Mor committee provides a framework for microfinance
institutions to morph into consumer banks with limited deposit taking
ability.
The committee also argues for removing all caps on the spreads that the intermediaries
might have in order to be a portfolio that qualifies for the priority sector tag. If this report
is accepted, it will eliminate the oppressive clauses under the Male gam committee
report. This is good news for both banks and financial institutions.

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CONCLUSION
The journey so far has never been a bed of roses for the MFIs. The usurious interest
rates, limited products, lack of accessibility have always won them brickbats from
the critics and sceptics.
The emergence of regulatory body for MFIs, enactment of legislation, performance
rating by industry bodies, increased funding, increasing spends on technology and
innovative products indemnify the potential of MFI industry.
Only 28 percent of the total demand for microfinance services would be covered by
the MFI globally by 2014 with the World Bank estimation of microfinance
requirement at USD 300 billion.
The world leaders at UN Summit 2005 have set the goal of reducing the extreme
poverty in the world by half by the year 2015, as one of the Millennium
Development Goals.
In that all-encompassing journey undoubtedly MFIs play a pivotal role. The
producers of software, hardware and associated infrastructure required by the MFIs
should by then acknowledge the undeniable prospects of MFIs and prepare
themselves accordingly. And by doing so they are also contributing to a larger social
cause; of course with business objective!

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BIBLIOGRAPHY
WEBSITES:
a)
b)
c)
d)
e)
f)
g)

http://indianresearchjournals.com/pdf/IJMFSMR/2012/November/13.pdf
indianresearchjournals.com/pdf/IJMFSMR/2012/
www.iitk.ac.in/ime/MBA_IITK/avantgarde/?p=475
indianexpress.com
www.crisil.com/pdf/ratings/indias-25-leading-mfis.pdf
www.infosys.com/.../Emerging-Trends-in-the-Microfinance-Industry.pdf
www.indiatimes.com

NEWSPAPERS & MAGAZINES: a)

b)
c)
d)
e)

BUSINESS WORLD
INDIA TODAY
THE HINDU
THE FINANCIAL EXPRESS
THE TIMES OF INDIA

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