A PROJECT

REPORT ON
 DECLARATION

We, Lovely Ganeriwal and Upasana Modi, students of

PGDBM OF SOM-LALIT INSTITUTE OF BUSINESS
MANAGEMENT, hereby declare that the project entitled Study
of Microfinance is an original work and the same has not
been submitted to any other institute for award of any other
degree. The feasible suggestions have been duly incorporated
in consultation with the supervisor.

Date: _______________

Place: ______________

Signature of the candidate,

Lovely Ganeriwal_______________

Upasana
Modi_______________

3
 Preface
Microfinance is one of the most important sectors in India. It not only falls in the
development sector but also forms an important part of the formal financial system of India.
Now, Microfinance is not only the job of development donors but also the greatest concern
for financial investors and the government. Seeing its importance, premier business schools
have started microfinance and rural finance services in their programs.

Microfinance deals with the basic fundamental and its starts with the history of microfinance
in India including different phrases like social banking, financial systems approach and
financial inclusion. The key principles of microfinance are also described.

It broadly focuses on microfinance credit lending models. Here, the microfinance credit
lending models which are not only used in India but are also used crossed the world is briefly
discussed. Microfinance business is very much associated with risk factor.

Microfinance is not only social and rural development but also for business and profit
making, based on the organisational mission. Anyways, for the organisational
substantiability, outreach and development of cost effective affordable financial products,
there must be a systematic marketing process. The role of microfinance and microfinance
institutions in women empowerment, education, health, entrepreneurship and business
development are discussed.

We have undergone my summer training at CORPORATION BANK, Ahmedabad. It is one

of the leading public sector bank across the country. We feel great pleasure to present this
report work after our training at CORPORATION BANK that produced to be golden
opportunity for us by enriching our knowledge by comparing our theoretical knowledge with
the managerial skill and application.

Simple language has been used throughout the report. Report is illustrated with figure, charts
and diagrams as and when required.

Finally we hope that this report will be able to give current scenario of microfinance to the
readers.

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 ACKNOWLEDGEMENT
We are satisfied with the motivational task of project work provided us. This has proved to
be the first step towards globalize world along with healthy management skills. The project
has been throughout a great learning about the microfinance.

We take this opportunity to express our heart-felt gratitude towards all those who generously
helped us colour the mosaic of this project with the tiles of their knowledge, expertise and
experience.

We are greatly indebted to Prof. J.P.JOSHIPURA, Director of Som-Lalit Institute of

Management Studies who gave the valuable opportunity of involving ourselves into such
lively project assignment. We also extend our profound thanks to Prof. Nirali Parikh who
through her intellect helped us in successfully completing this project. They provided us with
valuable insight into the topic and were a constant source of inspiration for us.

We are thankful to H.C.WADHWA (ASSISTANT GENERAL MANAGER) and Mr.

SWAMINATHAN (CHIEF GENERAL MANAGER) OF CORPORATION BANK ZONAL
OFFICE AHMEDABAD, for giving their full co-operation to us and giving valuable
information required for our project work.

We are also thankful to Friends of women’s world banking (FWWB), Vardan Trust and VIkas
Development Centre (NGO) for giving us valuable information and necessary material for our
study.

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 EXECUTIVE SUMMARY
As the global financial system buckles, microfinance institutions continue to grow on the
back of their record for low risk and solid returns

Microfinance gives small-scale financial services such as loans, savings, insurance and
money transfer to poor customers who would otherwise not have access to banking services.
Asia accounts for 70% of the global market for microfinance, with India having the largest
number of clients followed by Bangladesh, according to Micro Banking Bulletin, a non-profit
organisation that tracks microfinance institutions.
This report consists of study of microfinance in different countries like Latin America,
Bangladesh, Pakistan, Europe, Indonesia, Brazil and India.
In India, microfinance institutions have government-facilitated access to finance from banks.
Domestic banks are required to set aside 40% of investible funds for the priority sector,
which includes microcredit organisations. The target for foreign banks operating in India is at
32%.
In India, ICICI bank has wide range of microfinance and its products are innovative. It
provides loans to many MFIs and even NGOs. AT present, ICICI bank is on the top for
microfinance activities.
But, not only ICICI bank is providing microfinance but other commercial banks like Oriental
bank, Andhra bank, Yes bank, Corporation bank and many more have started microfinance
activities for the beneficial of the rural people.

Corporation bank offers a wide range of finance schemes to the farming community. For
farmers, Kisan Credit Card provides facility for withdrawal of cash from their account at
CorpBank ATMs and ATMs displaying VISA logo, round the clock. The bank has also been
focusing on micro finance and thus empowering Self Help Groups to enable them take up
gainful Self Employment. The bank lends farmers against warehouse receipts covering
agriculture produce of warehouses approved by the Multi Commodity Exchange Ltd.

Yet corporation bank is just at its initial stage and had to do a lot to expand its microfinance
activities. Looking at other banks and other countries, it has also now started with new
6
schemes and products for the rural people like providing loan to Dabbawalas, servants,
hawkers etc. And now it also branding its microfinance activities as
“GRAMEEN VIKAS KHENDRA”.
Corporation bank aims at leveraging its position as financial institutions that combines a rich
heritage with a futuristic outlook. Its activities will continue to assist corporate in their
business, even as it helps the common man realize his dreams. And its presence shall
continue to spread deeper into rural India, even as it reaches out further across the globe.

TABLE OF CONTENTS

TOPIC PAGE NO.

Objective

7
 Company profile

Study Line

Chapter 1-Introduction of Microfinance

1.1 Microfinance Definition

1.2 Strategic Policy Initiatives

1.3 Activities in Microfinance

1.4 Legal Regulations

Chapter 2-Micro-Finance in India

2.1 Distribution of Indebted Rural Households: Agency wise

2.2 Relative share of Borrowing of Cultivator Households

2.3 Distribution based on Asset size of Rural Households

2.4 Banking Expansion

2.5 Microfinance Social Aspects

Chapter 3- Self Help Groups

3.1 How self-help groups work

3.2 Sources of capital and links between SHGs and Banks

3.3 How SHGs save

3.4 SHGs-Bank Linkage Model

3.5 Life insurances for self-help group members

Chapter 4- Joint Liability Group

Chapter 5- Microfinance Model

Chapter 6- Microfinance at corporation bank

Chapter 7- microfinance at international level

7.1 Brazil

7.2 Latin America

7.3 Indonesia

7.4 Pakistan

7.5 Europe

8
7.6 Bangladesh

Chapter 8- Role, Functions and Working Mechanism of

Financial Institutions

8.1 ICICI Bank

8.2 YES Bank

8.3 Grameen Bank

8.4 Oriental Bank of Commerce

8.5 Andhra Bank

8.6 Friends of Women’s World Banking (FWWB) (MFI)

8.7 Vardhan Trust

8.8 Vikas Development Center (NGOs)

Chapter 9- Marketing of Microfinance Products

Chapter 10- Success Factors of Microfinance in India

Chapter 11- Issues related to Microfinance in India

Chapter 12- Recommendation & Conclusion

Chapter 13- Bibliography

9
 OBJECTIVE

“To study different aspects of

microfinance in India as well as
International level for expansion of
microfinance activities at
corporation bank.”

10
 COMPANY PROFILE
CORPORATION BANK:
Corporation Bank, founded in 1906 in Udupi, Karnataka state, India, is one of the Indian
banks in Public Sector Undertaking. The bank was founded with an initial capital of Rs. 5000
(USD 100), and first day’s canvassed resources of less than one USD 1, has currently (31
March 2004) 11,325 full time employees, and operates from several branches in India.

The Bank is a Public Sector Unit with 57.17% of Share Capital held by the Government of
India. The Bank came out with its Initial Public Offer (IPO) in October 1997 and 37.87% of
Share Capital is presently held by the Public and Financial Institutions. The Bank’s Net
Worth stood at Rs.3,054.92 crores as on 31 March 2005.

History
Corporation Bank, the oldest banking institution in the erstwhile undivided
Dakshina Kannada District of Karnataka and one of the oldest banks in India, was founded in
1906 in the Temple Town of Udupi, by a small group of philanthropists led by Khan Bahadur
Haji Abdulla Haji Kasim Saheb Bahadur. The need to start this bank was felt because there
was no such facility at Udupi, an important trading centre next to Mangalore in D.K. District.
The indigenous banking was largely in the hands of a few rich private individuals and
something had to be done to provide relief to the common man from the clutches of the
money lenders who held full sway. The first branch of a modern bank established in the
district was the Bank of Madras, one of the three Presidency Banks, which set up its office in
Mangalore in 1868 largely to cater to the business needs of a few British firms dealing in
export of plantation products. Its agent used to visit Udupi once a fortnight or so, to do
banking. Money remittances had to be made only through postal medium.

11
To overcome these drawbacks and also to provide banking facilities for Udupi in
particular and the district in general, a cosmopolitan group of philanthropists led by Haji
Abdulla Saheb made a bold venture to start this institution. What inspired the founding
fathers was the fervour of Swadeshism. For promoting the Bank ,
the Founder President made an appeal saying , " The primary object in forming the
‘Corporation' is not only to cultivate habits of thrift amongst all classes of people ,
without distinction of caste or creed, but also habits of co-operation amongst all classes.
This is ‘swadeshism', pure and simple and every lover of the country is expected to come
forward and co-operate in achieving the end in view.
" They rightly defined Swadeshism as institution-building to aid economic activity through
co-operation of all, shorn of distinction of caste and creed "The Canara Banking Corporation
(Udupi) Ltd.", as the institution was called then, started functioning as a ‘Nidhi' with a
humble beginning. The initial capital was Rs.5000/- and at the end of the first day, its
resources stood at 38 Rupees - 13 Annas and 2 Pies.
The setting up of the Canara Banking Corporation Ltd. seems to have given a fillip to co-
operative Banking and also to regular banking elsewhere in the district. Between 1909 and
1917, six co-operative banks came into being and during the decade immediately after the
First World War (1914-18) South Kanara gave birth to as many as eight banks. It is to the
credit of this Bank that despite two world wars, economic depression and stiff competition,
the Bank not only quite survived, but also made satisfactory progress.
Having been started at Udupi, the Bank first branched out by opening a branch at Kundapur
in 1923. The second branch of the Bank was opened in Mangalore at Car Street in 1926. The
Bank stepped into Kodagu District in 1934 by opening its seventh branch in Madikeri. In
1937, the Bank was included in the second schedule of Reserve Bank of India Act, 1934. In
1939, the Bank's name changed from "Canara Banking Corporation (Udupi) Ltd." to
"Canara Banking Corporation Ltd." The Bank graduated into a Regional Bank in 1945
when the total number of its branches stood at 28. In the year 1961, it took over ‘Bank of
Citizens, Belgaum.' In the same year, the Bank's Administration Office shifted from Udupi to
Mangalore.
The second change in the name of the Bank occurred in 1972, from ‘Canara Banking
Corporation Ltd'. to ‘Corporation Bank Limited.' The Bank was nationalised in 1980
along with 5 other private sector banks. After nationalisation, the pace of growth of the Bank
accelerated and it made all-round progress. Started as a common man's bank, it changed with
the times to meet the aspirations of the people but never swerved from its motto- "Sarve
Janah Sukhino Bhavantu" meaning Prosperity for All. It endeavoured and succeeded in
striking a right balance between traditional values and innovative approach, personalised
service and professional outlook and commercial considerations and public concern. One of
the unique achievements of the Bank is that it has been paying dividend continuously for the
last 98 years since its inception. Today, with the most modern technology-driven products
and services and nationwide branches & ATMs, Corporation Bank stands tall among
the Public Sector Banks in the country and is hailed as one among the well-managed Public
Sector Banks with excellent track record in all the key parameters of banking. The Bank has
the second largest ATM network in the public sector.

Completes a 100yrs of banking:

12
Corporation Bank completed 100 years of existence on 12 March 2006.
The Centenary celebrations were launched by Shri V. Leeladhar, Deputy Governor, Reserve
Bank of India with the Bank's Foundation Day lecture on 12 March 2005.
As a part of the Bank's centenary celebrations, a number of programmes and projects were
planned and executed. As a first step, the Bank has launched the Corp Kissan Card - debit
card tied up with VISA international,, to enable the farmers make timely purchases for
agricultural operation at Yeshwantpur-Malur in Kolar District on 13 March 2005. A modern
public library was dedicated to the citizens of Mangalore in DK District, the birth place of the
Bank by Shri P. Chidambaram, Hon'ble Union Finance Minister on 2 March 2006. The
library building also houses a Numismatic Museum and a multipurpose hall
for intellectual activities. The Bank has also set up libraries in 25 villages and given away
scholarship to 100 meritorious students of such villages for the pursuit of their higher
education. Such libraries will be set up in 75 more villages in a phased manner. Corporation
Bank - A Corporate Journey, the history of the Bank and Haji Abdullah Saheb a biography of
the Bank's Founder President have been published on the occasion of the valedictory function
of the Bank's Centenary Celebrations.

Ratings:
• CRISIL has re-affirmed the following programmes of Corporation Bank:
• Rs.2 billion Bond issue AAA
• Certificate of Deposits Programme P1+
• Fixed Deposit Programme FAAA
Awards won:
• National Award for Assistance to Exporters from the President of India (1976-77)
• Gem & Jewellery Export Promotion Council Award successively for 5 years from
1981 to 1985
• Shiromani Award 1992 for Banking from Union Minister for Commerce
• Best Bank Award for Excellence in Banking Technology from Institute for
Development and Research in Banking Technology (IDRBT), Hyderabad (2001)
• Best Bank Award for Innovative Usage and Application on INFINET (Indian
Financial Network) from Institute for Development and Research in Banking
Technology (IDRBT), Hyderabad(2002)
• Best Bank Award for Delivery Channels from Institute for Development and
Research in Banking Technology (IDRBT), Hyderabad (2003)

• Runner-up Awards in the “Best Online and Multi-channel Banking Team” and
“Outstanding achiever of the year-corporate” categories in recognition of outstanding

13
 achievement in Banking Technology for 2004, instituted under the aegis of
Indian Banks Association and Trade Fairs & Conferences International.

CURRENT SCENARIO:
Presently, the Bank has a network of 1054 Branches, 15 Extension Counters and 19
Currency Chests covering 24 states and 2 union territories of the country. The Bank
has 1032 online interconnected ATMs spread across the country.
The Bank has opened its Representative Offices at Dubai and Hong Kong for its overseas
operations.
The Bank has its presence in 98 centres out of 100 top centres in the country. It has a
specialised Branch Network of 157 Branches, which are designed to cater exclusively to the
banking needs of different segments like Personal Segment, Trade and Commercial Segment,
Small Scale Industry, Large and Medium Industrial Units, Non-Resident Indians, Housing
Sector and Export & Import Segment.

STUDY LINE

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Primary data

In order to know the working of MFIs and NGOS, we visited

MFI - Friends Of Women’s World Banking (FWWB)- Ahmedabad branch

NGO- Vikas Development Centre- Ahmedabad branch

Trust- Vardan Trust- Dahod

Besides this, we access Corporation bank files given by bank.

Secondary data

Internet

We browse different websites in order to collect information related to different countries

microfinance.

Books and Magazines

We read different books on microfinance which contains current scenario of India.

Other materials

It includes Files, annual report and documents of corporation bank.

CHAPTER 1
Introduction of Microfinance

15
Microfinance is defined as any activity that includes the provision of financial
services such as credit, savings, and insurance to low income individuals which fall just
above the nationally defined poverty line, and poor individuals which fall below that poverty
line, with the goal of creating social value. The creation of social value includes poverty
alleviation and the broader impact of improving livelihood opportunities through the
provision of capital for micro enterprise, and insurance and savings for risk mitigation and
consumption smoothing. A large variety of actors provide microfinance in India, using a
range of microfinance delivery methods. Since the ICICI Bank in India, various actors have
endeavoured to provide access to financial services to the poor in creative ways.
Governments also have piloted national programs, NGOs have undertaken the activity of
raising donor funds for on-lending, and some banks have partnered with public organizations
or made small inroads themselves in providing such services. This has resulted in a rather
broad definition of microfinance as any activity that targets poor and low-income individuals
for the provision of financial services. The range of activities undertaken in microfinance
include group lending, individual lending, the provision of savings and insurance, capacity
building, and agricultural business development services. Whatever the form of activity
however, the overarching goal that unifies all actors in the provision of microfinance is the
creation of social value.

1.1 Microfinance Definition

According to International Labor Organization (ILO), “Microfinance is an economic

development approach that involves providing financial services through institutions to low
income clients”.

In India, Microfinance has been defined by “The National Microfinance Taskforce, 1999” as
“provision of thrift, credit and other financial services and products of very small amounts to
the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and
improve living standards”.

"The poor stay poor, not because they are lazy but because they have no access to capital."

The dictionary meaning of ‘finance’ is management of money. The management of money

denotes acquiring & using money. Micro Finance is buzzing word, used when financing for
micro entrepreneurs. Concept of micro finance is emerged in need of meeting special goal to
empower under-privileged class of society, women, and poor, downtrodden by natural
reasons or men made; caste, creed, religion or otherwise. The principles of Micro Finance
are founded on the philosophy of cooperation and its central values of equality, equity
and mutual self-help. At the heart of these principles are the concept of human development
and the brotherhood of man expressed through people working together to achieve a better
life for themselves and their children.

Traditionally micro finance was focused on providing a very standardized credit product. The
poor, just like anyone else, (in fact need like thirst) need a diverse range of financial
16
instruments to be able to build assets, stabilize consumption and protect themselves
against risks. Thus, we see a broadening of the concept of micro finance--- our current
challenge is to find efficient and reliable ways of providing a richer menu of micro finance
products. Micro Finance is not merely extending credit, but extending credit to those who
require most for their and family’s survival. It cannot be measured in term of quantity, but
due weight age to quality measurement. How credit availed is used to survive and grow with
limited means.

Who are the clients of micro finance?

The typical micro finance clients are low-income persons that do not have access to formal
financial institutions. Micro finance clients are typically self-employed, often household-

based entrepreneurs. In rural areas, they are usually small farmers and others who are
engaged in small income-generating activities such as food processing and petty trade. In
urban areas, micro finance activities are more diverse and include shopkeepers, service
providers, artisans, street vendors, etc. Micro finance clients are poor and vulnerable non-
poor who have a relatively unstable source of income.

Access to conventional formal financial institutions, for many reasons, is inversely related to
income: the poorer you are the less likely that you have access. On the other hand, the
chances are that, the poorer you are, the more expensive or onerous informal financial
arrangements. Moreover, informal arrangements may not suitably meet certain financial

17
service needs or may exclude you anyway. Individuals in this excluded and under-
served market segment are the clients of micro finance.

As we broaden the notion of the types of services micro finance encompasses, the potential
market of micro finance clients also expands. It depends on local conditions and political
climate, activeness of cooperatives, SHG & NGOs and support mechanism. For instance,
micro credit might have a far more limited market scope than say a more diversified range of
financial services, which includes various types of savings products, payment and remittance
services, and various insurance products. For example, many very poor farmers may not
really wish to borrow, but rather, would like a safer place to save the proceeds from their
harvest as these are consumed over several months by the requirements of daily living.
Central government in India has established a strong & extensive link between NABARD
(National Bank for Agriculture & Rural Development), State Cooperative Bank, District
Cooperative Banks, Primary Agriculture & Marketing Societies at national, state, district and
village level.

The Need in India

• India is said to be the home of one third of the world’s poor; official estimates range from
26 to 50 percent of the more than one billion population.

• About 87 percent of the poorest households do not have access to credit.

• The demand for microcredit has been estimated at up to $30 billion; the supply is less than
$2.2 billion combined by all involved in the sector.

Due to the sheer size of the population living in poverty, India is strategically significant in
the global efforts to alleviate poverty and to achieve the Millennium Development Goal of
halving the world’s poverty by 2015. Microfinance has been present in India in one form or
another since the 1970s and is now widely accepted as an effective poverty alleviation
strategy. Over the last five years, the microfinance industry has achieved significant growth
in part due to the participation of commercial banks. Despite this growth, the poverty
situation in India continues to be challenging.

Some principles that summarize a century and a half of development practice were
encapsulated in 2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by the
Group of Eight leaders at the G8 Summit on June 10, 2004:

• Poor people need not just loans but also savings, insurance and money transfer services.

• Microfinance must be useful to poor households: helping them raise income, build up assets
and/or cushion themselves against external shocks.

• “Microfinance can pay for itself.” Subsidies from donors and government are scarce and
uncertain, and so to reach large numbers of poor people, microfinance must pay for itself.

• Microfinance means building permanent local institutions.

18
• Microfinance also means integrating the financial needs of poor people into a
country’s mainstream financial system.

• “The job of government is to enable financial services, not to provide them.”

• “Donor funds should complement private capital, not compete with it.”

• “The key bottleneck is the shortage of strong institutions and managers.” Donors should
focus on capacity building.

• Interest rate ceilings hurt poor people by preventing microfinance institutions from covering
their costs, which chokes off the supply of credit.

• Microfinance institutions should measure and disclose their performance – both financially
and socially.

Microfinance can also be distinguished from charity. It is better to provide grants to families
who are needy, or so poor they are unlikely to be able to generate the cash flow required to
repay a loan. This situation can occur for example, in a war zone or after a natural disaster.

Financial needs and financial services

In developing economies and particularly in the rural areas, many activities that would be
classified in the developed world as financial are not monetized: that is, money is not used to
carry them out. Almost by definition, poor people have very little money. But circumstances
often arise in their lives in which they need money or the things money can buy.

In Stuart Rutherford’s recent book The Poor and Their Money, he cites several types of
needs:

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

widowhood, old age.

• Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death.

• Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of
dwellings.

• Investment Opportunities: expanding a business, buying land or equipment, improving

housing, securing a job (which often requires paying a large bribe), etc.

Poor people find creative and often collaborative ways to meet these needs, primarily through
creating and exchanging different forms of non-cash value. Common substitutes for cash
vary from country to country but typically include livestock, grains, jewellery and precious
metals.

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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 mobilize savings

• Limited management capacity in MFIs

• Institutional inefficiencies

• Need for more dissemination and adoption of rural, agricultural microfinance

methodologies

Role of Microfinance:

The micro credit of microfinance programme was first initiated in the year 1976 in
Bangladesh with promise of providing credit to the poor without collateral , alleviating
poverty and unleashing human creativity and endeavour of the poor people. Microfinance
impact studies have demonstrated that

 Microfinance helps poor households meet basic needs and protects them against risks.

 The use of financial services by low-income households leads to improvements in

household economic welfare and enterprise stability and growth.

 By supporting women economic participation, microfinance empowers women,

thereby promoting gender-equity and improving household well being.

 The level of impact relates to the length of time clients have had access to financial
services.

The Origin of Microfinance

Although neither of the terms microcredit or microfinance were used in the academic
literature nor by development aid practitioners before the 1980s or 1990s, respectively, the
concept of providing financial services to low income people is much older.
20
The main objectives of these cooperatives “should be to control the use made of
money for economic improvements, and to improve the moral and physical values of people
and also, their will to act by themselves.”In the 1880s the British controlled government of
Madras in South India, tried to use the German experience to address poverty which resulted
in more than nine million poor Indians belonging to credit cooperatives by 1946.

Microfinance Today

In the 1970s a paradigm shift started to take place. The failure of subsidized government or
donor driven institutions to meet the demand for financial services in developing countries let
to several new approaches. Some of the most prominent ones are presented below.

Bank Dagan Bali (BDB) was established in September 1970 to serve low income people in
Indonesia without any subsidies and is now “well-known as the earliest bank to institute
commercial microfinance”. While this is not true with regard to the achievements made in
Europe during the 19th century, it still can be seen as a turning point with an ever increasing
impact on the view of politicians and development aid practitioners throughout the world. In
1973 ACCION International, a United States of America (USA) based non governmental
organization (NGO) disbursed its first loan in Brazil and in 1974 Professor Muhammad
Yunus started what later became known as the Grameen Bank by lending a total of $27 to 42
people in Bangladesh. One year later the Self-Employed Women’s Association started to
provide loans of about $1.5 to poor women in India. Although the latter examples still were
subsidized projects, they used a more business oriented approach and showed the world that
poor people can be good credit risks with repayment rates exceeding 95%, even if the interest
rate charged is higher than that of traditional banks. Another milestone was the
transformation of BRI starting in 1984. Once a loss making institution channelling
government subsidized credits to inhabitants of rural Indonesia it is now the largest MFI in
the world, being profitable even during the Asian financial crisis of 1997 – 1998.

1.2 Strategic Policy Initiatives

Some of the most recent strategic policy initiatives in the area of Microfinance taken by the
government and regulatory bodies in India are:

 Working group on credit to the poor through SHGs, NGOs, NABARD, 1995

21
  The National Microfinance Taskforce, 1999

 Working Group on Financial Flows to the Informal Sector (set up by PMO), 2002

 Microfinance Development and Equity Fund, NABARD, 2005

 Working group on Financing NBFCs by Banks- RBI

1.3 Activities in Microfinance

Microcredit:

It is a small amount of money loaned to a client by a bank or other institution. Microcredit

can be offered, often without collateral, to an individual or through group lending.

Micro savings:

These are deposit services that allow one to save small amounts of money for future use.
Often without minimum balance requirements, these savings accounts allow households to
save in order to meet unexpected expenses and plan for future expenses.

Micro insurance:

It is a system by which people, businesses and other organizations make a payment to share
risk. Access to insurance enables entrepreneurs to concentrate more on developing their
businesses while mitigating other risks affecting property, health or the ability to work.

Remittances:

These are transfer of funds from people in one place to people in another, usually across
borders to family and friends. Compared with other sources of capital that can fluctuate
depending on the political or economic climate, remittances are a relatively steady source of
funds.

1.4 Legal Regulations

Banks in India are regulated and supervised by the Reserve Bank of India (RBI) under the
RBI Act of 1934, Banking Regulation Act, Regional Rural Banks Act, and the Cooperative
Societies Acts of the respective state governments for cooperative banks.

NBFCs are registered under the Companies Act, 1956 and are governed under the RBI Act.
There is no specific law catering to NGOs although they can be registered under the Societies
Registration Act, 1860, the Indian Trust Act, 1882, or the relevant state acts. There has been
a strong reliance on self-regulation for NGO MFIs and as this applies to NGO MFIs
mobilizing deposits from clients who also borrow. This tendency is a concern due to
enforcement problems that tend to arise with self-regulatory organizations. In January 2000,
the RBI essentially created a new legal form for providing microfinance services for NBFCs
22
registered under the Companies Act so that they are not subject to any capital or

liquidity requirements if they do not go into the deposit taking business. Absence of liquidity
requirements is concern to the safety of the sector.

23
24
 CHAPTER 2
Microfinance in India:
At present lending to the economically active poor both rural and urban is pegged at around
Rs 7000 crores in the Indian banks’ credit outstanding. As against this, according to even the
most conservative estimates, the total demand for credit requirements for this part of Indian
society is somewhere around Rs 2,00,000 crores.

25
Microfinance changing the face of poor India

Micro-Finance is emerging as a powerful instrument for poverty alleviation in the new

economy. In India, micro-Finance scene is dominated by Self Help Groups (SHGs) - Banks
linkage Programme, aimed at providing a cost effective mechanism for providing financial
services to the 'unreached poor'. In the Indian context terms like "small and marginal
farmers", " rural artisans" and "economically weaker sections" have been used to broadly
define micro-finance customers. Research across the globe has shown that, over time,
microfinance clients increase their income and assets, increase the number of years of
schooling their children receive, and improve the health and nutrition of their families.

A more refined model of micro-credit delivery has evolved lately, which emphasizes the
combined delivery of financial services along with technical assistance, and agricultural
business development services. When compared to the wider SHG bank linkage movement in
India, private MFIs have had limited outreach. However, we have seen a recent trend of
larger microfinance institutions transforming into Non-Bank Financial Institutions (NBFCs).
This changing face of microfinance in India appears to be positive in terms of the ability of
microfinance to attract more funds and therefore increase outreach.

In terms of demand for micro-credit or micro-finance, there are three segments, which
demand funds. They are:

• At the very bottom in terms of income and assets, are those who are landless and engaged
in agricultural work on a seasonal basis, and manual labourers in forestry, mining,
household industries, construction and transport. This segment requires, first and
foremost, consumption credit during those months when they do not get labour work, and for
contingencies such as illness. They also need credit for acquiring small productive assets,
such as livestock, using which they can generate additional income.

• The next market segment is small and marginal farmers and rural artisans, weavers
and those self-employed in the urban informal sector as hawkers, vendors, and workers
in household micro-enterprises. This segment mainly needs credit for working capital, a
small part of which also serves consumption needs. This segment also needs term credit for
acquiring additional productive assets, such as irrigation pumpsets, borewells and livestock in
case of farmers, and equipment (looms, machinery) and worksheds in case of non-farm
workers.

• The third market segment is of small and medium farmers who have gone in for
commercial crops such as surplus paddy and wheat, cotton, groundnut, and others engaged
in dairying, poultry, fishery, etc. Among non-farm activities, this segment includes those in
villages and slums, engaged in processing or manufacturing activity, running provision
stores, repair workshops, tea shops, and various service enterprises. These persons are not
always poor, though they live barely above the poverty line and also suffer from inadequate
access to formal credit.

26
Well these are the people who require money and with Microfinance it is possible.
Right now the problem is that, it is SHGs' which are doing this and efforts should be made so
that the big financial institutions also turn up and start supplying funds to these people. This
will lead to a better India and will definitely fulfil the dream of our late Prime Minister,
Mrs. Indira Gandhi, i.e. Poverty.

One of the statements is really appropriate here, which is as:

“Money, says the proverb makes money. When you have got a little, it is often easy to
get more. The great difficulty is to get that little.” Adams Smith.

Today India is facing major problem in reducing poverty. About 25 million people in India
are under below poverty line. With low per capita income, heavy population pressure,
prevalence of massive unemployment and under employment, low rate of capital formation,
misdistribution of wealth and assets, prevalence of low technology and poor economics
organization and instability of output of agriculture production and related sectors have made
India one of the poor countries of the world.

Present Scenario of India:

India falls under low income class according to World Bank. It is second populated country
in the world and around 70 % of its population lives in rural area. 60% of people depend on
agriculture, as a result there is chronic underemployment and per capita income is only
$3262. This is not enough to provide food to more than one individual. The obvious result is
abject poverty, low rate of education, low sex ratio, and exploitation. The major factor
account for high incidence of rural poverty is the low asset base. According to Reserve Bank
of India, about 51 % of people house possess only 10% of the total asset of India .This has
resulted low production capacity both in agriculture (which contribute around 22-25% of
GDP) and Manufacturing sector. Rural people have very low access to institutionalized credit
(from commercial bank).

Poverty alleviation programmes and conceptualisation of Microfinance:

There has been a continuous effort of planners of India in addressing the poverty. They have
come up with development programmes like Integrated Rural Development programme
(IRDP), National Rural Employment Programme (NREP), Rural Labour Employment
Guarantee Programme (RLEGP) etc. But these programmes have not been able to create
massive impact in poverty alleviation. The production oriented approach of planning without
altering the mode of production could not but result of the gains of development by owners of
instrument of production. The mode of production does remain same as the owner of the
instrument has low access to credit which is the major factor of production. Thus in Nineties
National bank for agriculture and rural development (NABARD) launches pilot projects of
Microfinance to bridge the gap between demand and supply of funds in the lower rungs of
rural economy. Microfinance the buzzing word of this decade was meant to cure the illness of
rural economy. With this concept of Self Reliance, Self Sufficiency and Self Help gained
27
momentum. The Indian microfinance is dominated by Self Help Groups (SHGs) and
their linkage to Banks.

Deprived of the basic banking facilities, the rural and semi urban Indian masses are still
relying on informal financing intermediaries like money lenders, family members, friends
etc.

2.1 Distribution of Indebted Rural Households: Agency wise

Seeing the figures from the above table, it is evident that the share of institutional credit is
much more now.

The above survey result shows, institutional credit accounted for around two-thirds of the
credit requirement of rural households. This shows a comparatively better penetration of the
banking and financial institutions in rural India.

Percentage distribution of debt among indebted Rural Labor Households by source of

debt

28
The table above reveals that most of the rural labour households prefer to raise loan from the
non-institutional sources. About 64% of the total debt requirement of these households was
met by the non-institutional sources. Money lenders alone provided debt (Rs.1918) to the
tune of 32% of the total debt of these households as against 28% during the survey. Relatives
and friends and shopkeepers have been two other sources which together accounted for about
22% of the total debt at all-India level.

The institutional sources could meet only 36% of the total credit requirement of the rural
labour households with only one percent increase over the previous survey in 1993-94.
Among the institutional sources of debt, the banks continued to be the single largest source of
debt meeting about 17 percent of the total debt requirement of these households. In
comparison to the previous enquiry, the dependence on co-operative societies has increased
considerably. 13% of the debt was raised from this source as against 8%. However, in the
case of the banks and the government agencies it decreased marginally from 18.88% and
8.27% to 17.19% and 5.37% respectively during the survey.

29
2.2 Relative share of Borrowing of Cultivator Households (in per cent)

Table shows the increasing influence of moneylenders in the last decade. The share of
moneylenders in the total non institutional credit was declining till 1981, started picking up
from the 1990s and reached 27 per cent in 2001.

At the same time the share of commercial banks in institutional credit has come down by
almost the same percentage points during this period. Though, the share of cooperative
societies is increasing continuously, the growth has flattened during the last three decades.

2.3 Distribution based on Asset size of Rural Households (in per cent)

30
The households with a lower asset size were unable to find financing options from
formal credit disbursement sources. This was due to the requirement of physical collateral by
banking and financial institutions for disbursing credit. For households with less than Rs
20,000 worth of physical assets, the most convenient source of credit was non institutional
agencies like landlords, moneylenders, relatives, friends, etc.

Looking at the findings of the study commissioned by Asia technical Department of the
World Bank (1995), the purpose or the reason behind taking credit by the rural poor was
consumption credit, savings, production credit and insurance.

Consumption credit constituted two-thirds of the credit usage within which almost three-
fourths of the demand was for short periods to meeting emergent needs such as illness and
household expenses during the lean season.

Almost entire demand for the consumption credit was met by informal sources at high to
exploitive interest rates that varied from 30 to 90 per cent per annum. Almost 75 per cent of
the production credit (which accounted for about one-third of the total credit availed of by the
rural masses) was met by the formal sector, mainly banks and cooperatives.

2.4 Banking Expansion

Starting in the late 1960s, India was the home to one of the largest state interventions in the
rural credit market. This phase is known as the “Social Banking” phase.

It witnessed the nationalization of existing private commercial banks, massive expansion of

branch network in rural areas, mandatory directed credit to priority sectors of the economy,
subsidized rates of interest and creation of a new set of regional rural banks (RRBs) at the
district level and a specialized apex bank for agriculture and rural development (NABARD)
at the national level.

The Net State Domestic Product (NSDP) is a measure of the economic activity in the state
and comparing it with the utilization of bank credit or bank deposits indicates how much
economic activity is being financed by the banks and whether there exists untapped potential
for increasing deposits in that state.

E.g. In the year 2003-2004 the percentage of bank deposits to NSDP is pretty high at
around 75%-80% in Bihar and Jharkhand or these states are not as under banked as
thought to be.

2.5 Microfinance Social Aspects

31
Micro financing institutions significantly contributed to gender equality and women’s
empowerment as well as poor development and civil society strengthening. Contribution to
women’s ability to earn an income led to their economic empowerment, increased well being
of women and their families and wider social and political empowerment.

Microfinance programs targeting women became a major plank of poverty alleviation and
gender strategies in the 1990s. Increasing evidence of the centrality of gender equality to
poverty reduction and women’s higher credit repayment rates led to a general consensus on
the desirability of targeting women.

32
 CHAPTER 3
Self Help Groups (SHGs):
Self- help groups (SHGs) play today a major role in poverty alleviation in rural India. A
growing number of poor people (mostly women) in various parts of India are members of
SHGs and actively engage in savings and credit (S/C), as well as in other activities (income
generation, natural resources management, literacy, child care and nutrition, etc.). The S/C
focus in the SHG is the most prominent element and offers a chance to create some control
over capital, albeit in very small amounts. The SHG system has proven to be very relevant
and effective in offering women the possibility to break gradually away from exploitation
and isolation.

3.1 How self-help groups work

NABARD (1997) defines SHGs as "small, economically homogenous affinity groups of

rural poor, voluntarily formed to save and mutually contribute to a common fund to be
lent to its members as per the group members' decision".

Most SHGs in India have 10 to 25 members, who can be either only men, or only women, or
only youth, or a mix of these. As women's SHGs or sangha have been promoted by a wide
range of government and non- governmental agencies, they now make up 90% of all SHGs.

The rules and regulations of SHGs vary according to the preferences of the members and
those facilitating their formation. A common characteristic of the groups is that they meet
regularly (typically once per week or once per fortnight) to collect the savings from
members, decide to which member to give a loan, discuss joint activities (such as training,
running of a communal business, etc.), and to mitigate any conflicts that might arise. Most
SHGs have an elected chairperson, a deputy, a treasurer, and sometimes other office holders.
33
Most SHGs start without any external financial capital by saving regular
contributions by the members. These contributions can be very small (e.g. 10 Rs per week).
After a period of consistent savings (e.g. 6 months to one year) the SHGs start to give loans
from savings in the form of small internal loans for micro enterprise activities and
consumption. Only those SHGs that have utilized their own funds well are assisted with
external funds through linkages with banks and other financial intermediaries.

However, it is generally accepted that SHGs often do not include the poorest of the poor, for
reasons such as:

(a) Social factors (the poorest are often those who are socially marginalized because of caste
affiliation and those who are most skeptical of the potential benefits of collective action).

(b) Economic factors (the poorest often do not have the financial resources to contribute to
the savings and pay membership fees; they are often the ones who migrate during the lean
season, thus making group membership difficult).

(c) Intrinsic biases of the implementing organizations (as the poorest of the poor are the
most difficult to reach and motivate, implementing agencies tend to leave them out,
preferring to focus on the next wealth category).

3.2 Sources of capital and links between SHGs and Bank

SHGs can only fulfil a role in the rural economy if group members have access to financial
capital and markets for their products and services. While the groups initially generate their
own savings through thrift (whereby thrift implies savings created by postponing almost
necessary consumption, while savings imply the existence of surplus wealth), their aim is
often to link up with financial institutions in order to obtain further loans for investments in
rural enterprises. NGOs and banks are giving loans to SHGs either as "matching loans"
(whereas the loan amount is proportionate to the group's savings) or as fixed amounts,
depending on the group's record of repayment, recommendations by group facilitators,
collaterals provided, etc.

3.3 How SHGs save?

Self-help groups mobilize savings from their members, and may then on-lend these funds to
one another, usually at apparently high rates of interest which reflect the members’
34
understanding of the high returns they can earn on the small sums invested in their
micro-enterprises, and the even higher cost of funds from money lenders. If they do not wish
to use the money, they may deposit it in a bank. If the members’ need for funds exceeds the
group’s accumulated savings, they may borrow from a bank or other organization, such as a
micro-finance non-government organization, to augment their own fund.

The system is very flexible. The group aggregates the small individual saving and borrowing
requirements of its members, and the bank needs only to maintain one account for the group
as a single entity. The banker must assess the competence and integrity of the group as a
micro-bank, but once he has done this he need not concern himself with the individual loans
made by the group to its members, or the uses to which these loans are put. He can treat the
group as a single customer, whose total business and transactions are probably similar in
amount to the average for his normal customers, because they represent the combined
banking business of some twenty ‘micro-customers’. Any bank branch can have a small or a
large number of such accounts, without having to change its methods of operation.

Unlike many customers, demand from SHGs is not price-sensitive. Illiterate village women
are sometimes better bankers than some with more professional qualifications. They know
that rapid access to funds is more important than their cost, and they also know, even though
they might not be able to calculate the figures, that the typical micro-enterprise earns well
over 500% return on the small sum invested in it (Harper, M, 1997, p. 15). The groups thus
charge themselves high rates of interest; they are happy to take advantage of the generous
spread that the NABARD subsidized bank lending rate of 12% allows them, but they are also
willing to borrow from NGO/MFIs which on-lend funds from SIDBI at 15%, or from ‘new
generation’ institutions such as Basic Finance at 18.5% or 21%.

3.4 SHGs-Bank Linkage Model

NABARD is presently operating three models of linkage of banks with SHGs and NGOs:

Model – 1:

In this model, the bank itself acts as a Self Help Group Promoting Institution (SHPI). It takes
initiatives in forming the groups, nurtures them over a period of time and then provides credit
to them after satisfying itself about their maturity to absorb credit. About 16% of SHGs and
13% of loan amounts are using this model (as of March 2002).

Model – 2:

In this model, groups are formed by NGOs (in most of the cases) or by government agencies.
The groups are nurtured and trained by these agencies. The bank then provides credit directly
to the SHGs, after observing their operations and maturity to absorb credit. While the bank
35
provides loans to the groups directly, the facilitating agencies continue their
interactions with the SHGs. Most linkage experiences begin with this model with NGOs
playing a major role. This model has also been popular and more acceptable to banks, as
some of the difficult functions of social dynamics are externalized. About 75% of SHGs and
78% of loan amounts are using this model.

Model – 3:

Due to various reasons, banks in some areas are not in a position to even finance SHGs
promoted and nurtured by other agencies. In such cases, the NGOs act as both facilitators and
micro- finance intermediaries. First, they promote the groups, nurture and train them and then
approach banks for bulk loans for on-lending to the SHGs. About 9% of SHGs and 13% of
loan amounts are using this model.

Comparative Analysis of Micro-finance Services offered to the poor

36
3.5 Life insurances for self-help group members

37
The United India Insurance Company has designed two PLLIs (personal line life
insurances) for women in rural areas. The company will be targeting self-help groups, of
which there are around 200,000 in the country, with 15-20 women in a group.

The two policies are

(1) the Mother Teresa Women & Children Policy, with the aim of giving to the woman in the
event of accidental death of her husband and to support her minor children in the event of her
death, and

(2) The Unimicro Health Scheme, giving personal accident and hospitalization covers besides
cover for damage to dwelling due to fire and allied perils.

38
 CHAPTER 4
Joint Liability Group:
• Under this model, a banking unit is a set up with field manager, few field assistant
and the number of banking personnel. This banking unit covers an area of about 15-
20 villages, and sometimes it goes up to 25 villages.

• In the first stages, the field manager and the field assistants develop acquaintance in
the working area by paying few preliminarily visits to the targeted village ort area,
built rapport with the villagers, analyse the socio-economic conditions and various
issues of the villagers, and therefore identify prospective clients.

• In the second stage, the field manger and field assistants revealed the purpose,
functions, and operational modes of the bank/MFIs to the local people.

• In the third stage, five to seven prospective borrowers/clients are identified and
organised into a group which is called a Joint Liability Group (JLG).

• In the fourth stage, the banking activities are started with the provision of loans.

The loan methodology of JLG model:

At first the only 2 members of the group are eligible for the loan and hence receive the loan.
After successful repayment of the principal and with the interests by the first two members
within a stipulated repayment period, the other members are eligible for the loans. However
the repayment period varies from 6 to 15 weeks, based on the MFI using this model.

This model does not required any collateral against the loan rather it creates a substantial peer
pressure among all the members of the group, and this peer pressure serves as collateral on
the loan. This peer pressure develops collective responsibility among the members thereby
reducing the possibility of loan loss.

CHAPTER 5
39
Micro Finance Models:
1. Micro Finance Institutions (MFIs):

MFIs are an extremely heterogeneous group comprising NBFCs, societies, trusts and
cooperatives. They are provided financial support from external donors and apex institutions
including the Rashtriya Mahila Kosh (RMK), SIDBI Foundation for micro-credit and
NABARD and employ a variety of ways for credit delivery.

Since 2000, commercial banks including Regional Rural Banks have been providing funds to
MFIs for on lending to poor clients. Though initially, only a handful of NGOs were “into”
financial intermediation using a variety of delivery methods, their numbers have increased
considerably today. While there is no published data on private MFIs operating in the
country, the number of MFIs is estimated to be around 800.

Legal Forms of MFIs in India

2. Bank Partnership Model

This model is an innovative way of financing MFIs. The bank is the lender and the MFI acts
as an agent for handling items of work relating to credit monitoring, supervision and
recovery. In other words, the MFI acts as an agent and takes care of all relationships with the
40
client, from first contact to final repayment. The model has the potential to
significantly increase the amount of funding that MFIs can leverage on a relatively small
equity base.

A sub - variation of this model is where the MFI, as an NBFC, holds the individual loans on
its books for a while before securitizing them and selling them to the bank. Such refinancing
through securitization enables the MFI enlarged funding access. If the MFI fulfils the “true
sale” criteria, the exposure of the bank is treated as being to the individual borrower and the
prudential exposure norms do not then inhibit such funding of MFIs by commercial banks
through the securitization structure.

3. Banking Correspondents

The proposal of “banking correspondents” could take this model a step further extending it to
savings. It would allow MFIs to collect savings deposits from the poor on behalf of the bank.
It would use the ability of the MFI to get close to poor clients while relying on the financial
strength of the bank to safeguard the deposits. This regulation evolved at a time when there
were genuine fears that fly-by-night agents purporting to act on behalf of banks in which the
people have confidence could mobilize savings of gullible public and then vanish with them.
It remains to be seen whether the mechanics of such relationships can be worked out in a way
that minimizes the risk of misuse.

4. Service Company Model

Under this model, the bank forms its own MFI, perhaps as an NBFC, and then works hand in
hand with that MFI to extend loans and other services. On paper, the model is similar to the
partnership model: the MFI originates the loans and the bank books them. But in fact, this
model has two very different and interesting operational features:

(a) The MFI uses the branch network of the bank as its outlets to reach clients. This
allows the client to be reached at lower cost than in the case of a stand–alone MFI. In
case of banks which have large branch networks, it also allows rapid scale up. In the
partnership model, MFIs may contract with many banks in an arms length
relationship. In the service company model, the MFI works specifically for the bank
and develops an intensive operational cooperation between them to their mutual
advantage.

(b) The Partnership model uses both the financial and infrastructure strength of the
bank to create lower cost and faster growth. The Service Company Model has the
potential to take the burden of overseeing microfinance operations off the
management of the bank and put it in the hands of MFI managers who are focused on
microfinance to introduce additional products, such as individual loans for SHG

41
graduates, remittances and so on without disrupting bank operations and
provide a more advantageous cost structure for microfinance.

42
 CHAPTER 6
Micro Finance at Corporation bank:
Corporation Bank to focus on rural development:

IMPLEMENTATION of rural development programmes and introduction of `innovative

technology-driven' products are high on the agenda of Corporation Bank during the centenary
year.

The bank is also introducing `Corp Kisan Card', a debit card, for farmers. Corporation Bank
is also planning to set up a `high-tech' public library in Mangalore. This library will house a
research-cum-study centre, a yoga centre, and a numismatic museum.

The total business of the bank stood at Rs 40,540 crore as on December 31. The aggregate
deposits and net advances stood at Rs 24,174.59 crore and Rs 16,366.35 crore respectively
during the period.

The bank's net worth improved to Rs 3,063 crore and capital adequacy ratio stood at 20.27
per cent. The net NPA, which came down by 20 basis points in the last one year, stood at
1.49 per cent.

The bank has 1,655 service outlets, including 773 branches. 361 branches have been brought
under core banking solution network. The bank has been paying dividend continuously for
the past 98 years.

Agriculture finance

Corporation bank offers a wide range of finance schemes to the farming community. For
farmers, Kisan Credit Card provides facility for withdrawal of cash from their account at
CorpBank ATMs and ATMs displaying VISA logo, round the clock. The bank has also been
focusing on micro finance and thus empowering Self Help Groups to enable them take up
gainful Self Employment. The bank lends farmers against warehouse receipts covering
agriculture produce of warehouses approved by the Multi Commodity Exchange Ltd.

Corporation Bank to centralise processing of agricultural loans:

The Reserve Bank of India (RBI) had permitted the bank to introduce the centralised
processing system.

Corporation Bank was the first to introduce centralised processing for agriculture loans. It
was being started mainly at the village level.

The bank had three major strengths in the form of strong capital, low intermediation
cost and strong technology. As for future plans, the bank wanted to get into investment
banking, insurance products, and retail banking.

43
It also wanted to get into depository participant services. The bank would focus more
on corporate social responsibility in accordance with their business goal.

The bank was training its manpower for investment banking activities.

Corporation Bank model for rural areas working well:

Branchless Banking:

In 2006, when Corporation Bank introduced `branchless banking' model it catered to the
needs of rural masses that did not have access to banking service. A steady growth in the
number of transactions with more number of small amounts being transacted shows that
Corporation Bank’s branchless banking model is gaining acceptance among people in these
hitherto unbanked areas.

Corporation Bank, “Branchless banking is by the villagers and for the villagers.” In this
model, the bank appoints a business correspondent in an unbanked area who uses modern
biometric smart cards and voice-guided systems to provide secure banking operation for rural
people without any barrier on timings.

The bank has implemented branchless banking model at 33 places. One of the reasons was
that even small deposits (as little as Rs 10) were accepted. During March, the branchless
banking model conducted more than 1,400 transactions, involving more than Rs 5.95 lakh.
Of this, deposits were over Rs 3 lakh. More than 700 unique customers availed themselves of
this facility. Earlier, people did not bother to save small amounts either due to lack of a bank
branch in their village or the amount spent on travelling to the nearest branch.

Mr Sambamurthy said he observed customers saving these tiny amounts of money for their
children’s education.

“Nearly 80 per cent of the people who come to operate are women. That means there is
empowerment of women in villages.

44
Corporation Bank is now planning to brand the branchless banking model. For the
customer, there should be a brand. “We are planning to give a name like ‘Corp Bank
Gramin Vikas Kendra’.

At present, the branchless banking model offers products such as savings bank, general credit
card to its customers. Loan and remittance products are offered in some units. The smart card
in branchless banking offers as many facilities as possible.

Corporation Bank appointed business correspondents and provided them a simple handheld
secure terminal. The customers in un-banked villages are provided with smart cards or RFID
(radio frequency identification) cards. These cards include their name, photograph, address,
and their fingerprints.

The voice-guidance system from business correspondent's device confirms the authentication
of the transaction to both the customer and the business correspondent. Customers carry out
basic banking transactions from the comfort of their village and at any time of the day
irrespective of the banking hours. The business correspondent uploads the daily transactions
to the bank branch through the telecommunication network.

The year 2008 saw the operating model of branchless banking units witnessing changes both
in size and appearance.

When the bank implemented the branchless banking activity on a pilot basis in two villages
of Dakshina Kannada district in Karnataka in August 2007, the size of the unit was almost
equal to that of an A4 paper. Now, the size is almost half of that with additional features.

The need for the business correspondents to go in for a separate handset for mobile and land
phones has been eliminated in some of the new units as they come with GSM chips in them.

During the year, Corporation Bank went in for branding of its branchless banking units. Now,
the bank calls them as `Corp Bank Gramin Vikas Kendras'.

During 2008, the number of branchless banking units of Corporation Bank increased to 202
as against hardly a handful in the previous year. While the first branchless banking unit was
opened in Calangute in Goa in 2006, the latest one (202nd) was opened at Sarathi in
Dharwad district by the end of 2008.

45
Some of the areas where the branchless banking functioned into include dairy
farmers, farmers' shandy, self-help group (SHG) sector, among others.

In the branchless banking model adopted for Chittoor dairy farmers, who are associated with
National Dairy Development Board, the payment for the milk poured in a dairy gets directly
credited to the account of the farmer concerned, which he/she can transact at the time suitable
for him/her.

In `uzhavar santhai', farmers come to the shandy by 5 a.m. for selling the commodities and go
back to the villages by 10 a.m. But money for daily turnover is the main requirement for
them, and moneylenders are the main source for them. Considering the need for an overdraft
facility, the bank introduced the `branchless banking' model in `uzhavar santhai' in Sivaganga
on a pilot basis. One of the farmers, who is a business correspondent, sets up a terminal in the
shandy and meets the overdraft requirements of the farmers there. For marginal farmers
having small land holdings, the overdraft is given at 4 per cent interest . By the time the bank
branch opens for public, the business correspondent remits the money at the bank.

SHGs:

Branchless banking also made inroads into the SHG segment during the year. In this, two
cards (of the authorised members) need to be authorised at the business correspondent's
terminal at the time of carrying out the transactions. This saves the time of SHG members
who otherwise would have to travel to the branch. It also reduces crowding at the branch as
the SHG members carry out the transactions in their villages.

The model was also customized to provide payments in social security pension and NREG
schemes.

TRANSACTIONS:

The number of transactions and the amount transacted also witnessed growth during the
period. The bank, which transacted around 1,000 transactions worth Rs 2.5 lakh in December
2007 (RPT December 2007), saw more than seven-fold jump in transactions and nearly 10-
fold jump in amount during November 2008. Branchless banking units carried out nearly
7,700 transactions worth Rs 19.39 lakh till November 2008.

Most of the customers of the branchless banking are women, constituting more than 65 per
cent of the total transactions, indicating the women empowerment.

The bank does not see this merely as a regulatory requirement but also as a viable business
model to increase its clientele base and to provide basic banking services at affordable cost to
those communities who were hitherto deprived of such facilities.

Corporation Bank to promote organic farming:

46
Corporation Bank signed a memorandum of understanding (MoU) with the Karnataka State
Organic Farming Mission (KSOFM) for the promotion of organic farming in the state. According to
the agreement, Corporation Bank will be nominated as the preferred bank by KSOFM for financing
farmers and their entities in taking up organic farming activities.

The bank will also assist the mission in undertaking various developmental activities for
promoting organic farming by setting up seed banks, marketing outlets, computer training
centres, libraries, goshalas among others in all 176 talukas in the state. Corporation Bank had
been focusing on extending loans to priority sector and 40 per cent of its total agriculture
loans were extended to farmers in Karnataka last year.

The bank proposes to open more branches in the state to increase their share of farm loans.

“Promotion of organic farming will result in better earning for the farmers and it is good for
the environment. The bank is identifying the cause of organic farming as one of its prime
areas of concern and is associating itself with promotion of such causes supported by the
State Level Empowered Committee on Organic Farming in the state

The state government has increased allocation to organic farming from Rs 43 crore in 2008-
09 to Rs 100 crore in 2009-10 to extend the organic farming across the state. He expressed
confidence that with the help of Corporation Bank joining hands with the state government,
the organic farming movement will gather further momentum in the state.

Organic agriculture has been gaining acceptance in India in the recent years. Many state
governments have been promoting the conversion of chemical farming to organic. Prominent
among them are Madhya Pradesh, Maharashtra, Orissa, Uttaranchal, Karnataka and Kerala.

The total area under organic cultivation is estimated at 865,000 hectares in the country.
Incidentally, Karnataka is the first state in the country to announce a separate policy on
organic agriculture.

According to latest information, the organic products market in India is estimated at Rs 100
crore and the exports from India were Rs 350 crore last year. As the operation of the mission
extends to the whole of Karnataka, the units of the Mission will use the bank for maintaining
their current/savings accounts, for remittances of funds, issuance of at par cheques, DDs
among others. The bank will offer those services on a very preferential basis with no charges.

The bank will also make special efforts to propagate the concept of organic farming through
the various forums available under the Lead Bank Scheme, in association with the mission

CHAPTER 7
Micro Finance at International Level:
7.1 BRAZIL:
47
INTRODUCTION:

• The microfinance sector in Brazil is defined by seemingly paradoxical characteristics.

Despite being the birthplace of Latin America’s first microfinance institution (MFI) in
1973, microfinance in Brazil has experienced levels of growth inferior to those of
Latin American countries. While the late 1990’s have seen an increase in activity as
demonstrated by the 220% jump in total portfolio growth of Brazilian MFIs between
1999 and 2001, this indicator must be understood within the larger market context.
• An analysis of active client numbers in the seven largest MFIs in Brazil shows that
while growth rates reached 40%-60% in 1998, there has been a marked slow-down in
this rhythm since 2001.
• The roughly 100 MFIs in the country account for about 110.000 clients, which
represents less than 1% of the potential market of the estimated 15.7 million micro
entrepreneurs in Brazil.
• In Brazil, the microfinance sector is dominated by one product: productive credit for
micro entrepreneurs. This very limited form of microfinance consists of working
capital loans of R$ 500 – R$ 5000 with eight to twelve month terms. It is important to
note, however, that the low-income families who constitute the potential market for
microfinance.

OBJECTIVE:

• Determine how credit and savings are perceived among low-income populations.

• Examine the behaviours, strategies and mechanisms poor people use to manage their
financial resources.

• Identify the events and circumstances that create the need to borrow money or use
savings.

• Identify the social dynamics behind the relationship between low-income populations
and financial service providers.

• Propose concepts that may be used as a basis for further product development
research.

Financial needs and mechanisms used :

Very low income Low income Medium low

income

48
Emergencies Illness health care Family/friends sale Relative employer Relative bank
cost of household goods sale of household credit line, cash
goods, advance from credit
consumer-lending card, post-dated
agenda cheques

Life cycle Funeral cost Collection from family/friends family/friends

events neighbours financing plan from financing plan from
family/friends funeral home, funeral home,
financing plan from funeral insurance
funeral home cash advance from
credit card, bank
credit line

Wedding Savings Savings Savings

family/friends family/friends

Payment plan, bank

loan

Other celebrations Saving borrowed Saving payment Saving payment

credit plan plan

Opportunities Home Salary advance, Salary advance, Bank loan

improvement borrowed credit bank loan

Education Use not identified Family/friends Family/ friends,

bank loans

Start up business Use not identified Indemnities from Indemnities from

previous previous
employment employment

Expand business Use not identified Payment plan, Payment plan,

credit card cheques, credit card cheques,
MFIs loan MFIs loan

Seasonal End of the year Borrowed credit Payment plan Payment plan, post-
dated cheques,
overdraft facility,
credit card, bank
credit line.

Carnival and sao Family/ friends Payment plan Credit card, post-
Joao family/friends dated cheques

Income tax Use not identified Use not identified Instalments

49
 School related Family/friends Payment plan, post- Payment plan, post-
expenses dated cheques dated cheques,
credit card.

Microfinance Instruments:

LESSON LEARNED:

⇒ Current products meet only one of the many financial needs of potential clients.
⇒ MFIs are targeting too high.
⇒ The ambiguities of having a marred credit record
⇒ Cultural perceptions of credit and financial institutions impact the willingness to take
loans.
⇒ MFIs are relatively unknown.
⇒ MFIs lack a distinctive competitive position in the market.

50
NEW PRODUCT CONCEPTS:

1. Insurance for prescribed medicine and laboratory tests.

Public health services do not cover the costs of prescribed medicine and laboratory tests,
creating a serious financial burden for low-income populations. An insurance product to
cover these costs would help decrease considerably the impact an illness can have on
household budgets.

2. Funeral Insurance.
There is a recognized and partially met demand for funeral insurance among low and
medium-low income groups, but the demand still appears great. The product would involve
the payment of very small monthly installments for a few years, making the client eligible for
a pre-determined sum to be spent on funeral costs. The benefits would be transferable to self-
defined family members, named in the initial contract.

3. Professional Training Loan.

There appears to be demand for a loan available to salaried workers, the unemployed or
micro entrepreneurs to pursue secondary, university or professional training. To help clients
gain confidence in their ability to repay, the loan could initially be offered with a grace
period and involve repayment in very small installments.

4. A loan to rehabilitate one’s credit record.

A considerable number of people in the medium and low-income segments are excluded
from the financial market due to being on the blacklists of the credit protection agencies.
Many end up on these lists as a result of adverse circumstances and not deliberate negligence
of their obligations. These people are often eager to rehabilitate their names and fulfill their
obligations but cannot do so because they do not have sufficient resources to pay the debt that
has invariably increased due to interests, fines and fees.

5. Home improvement loan.

Demand for home improvement loans among the low-income population is strong, and
although the Caixa Econômica Federal offers products to meet this demand, the truly low-
income segments do not appear to use them.

6. Community credit card.

Credit cards that allow payment in up to 30-40 days without interest are greatly appreciated
due to the convenience by the and security they offer. The high acceptance of credit cards in
low-income populations could be exploited MFIs to not only increase their client base but to
contribute to growth in local economies.

7. Registration of third-person payment plans.

Using “borrowed” checks and credit cards and the common practice of purchasing items in
the name of someone else point to a largely hidden potential market for MFIs. Institutions
working in the microfinance sector could harness this potential through an optional
registration process that would formalize the informal.

51
 8. Micro-leasing.
As a way to avoid the use of a co-signer, MFIs could introduce micro-leasing, aimed at micro
entrepreneurs wishing to purchase equipment, in which the good acquired would serve as a
guarantee. Similar to a traditional leasing plan, the micro entrepreneur would pay a monthly
installment. The maximum payment would be equivalent to the maximum amount of credit.

9. Contractual savings for education.

This product could consist of the payment of fixed installments for a period of time (5,10 or
15 years), to be determined by the client according to his capacity. At the end of the term, the
accumulated amount would be used for payment of educational expenses or professional
training.

10. “Incentivized” savings

Populations studied almost universally recognize the usefulness of saving but find current
incentives unattractive. The low interest rates and vague chances to win the monthly drawing
that many banks propose do not appear to motivate clients to place the little money that is left
over in a savings account: purchasing a good is perceived as more satisfying.

7.2 LATIN AMERICA:

INTRODUCTION:

Latin America is home to some of the most experienced, diverse and developed microfinance
institutions (MFIs) in the world.

The goal is not to identify regional leader institutions or create performance targets.

52
At the global level, Latin American MFIs have more assets, leverage more equity and attract
more commercial investment than MFIs in other regions. They also reach fewer clients and
achieve marginal returns. Some characteristics of a more commercial market may already be
visible in the aggregate. Latin American loan portfolios are increasingly funded through
commercial financing (especially through savings) and operating expenses are decreasing as
many, but not all, MFIs become more efficient. Perhaps the higher portfolio at risk signals
the emergence of a more competitive market in a small number of countries.

53
1. Scale and outreach:
LATIN AMERICA MFIs:

• Have achieved greater financial scale than other regions,

• Carry larger average balances per borrower.
• Latin America's average Gross Loan Portfolio is almost 75% larger than the
average for Asian MFIs, who rank a distant second.
• The aggregate indicator hides an important trend in Latin American microfinance:
the diversity of MFIs in terms of mission, size, legal status, or target market
creates results that span the spectrum of MFI outreach globally, and even defines
its outer limits.

2. Institutional structure:
LATIN AMERICA MFIs:
• lAre more leveraged than MFIs in other regions
• Access more commercial financing
• Mobilize greater savings volume but,
• Reach fewer savers than Asian and African MFIs.
• Latin American MFIs are more successful at leveraging their equity and accessing
commercial capital than MFIs in other regions. Debt accounts for 2.7 times the
equity of the average Latin American MFI.
• Regions in terms of attracting commercial funds. In total, commercially priced
liabilities represent over 70% of the average Latin American Gross Loan Portfolio
compared to an average of 44.1% for all MFIs.

3. Profitability and sustainability:

LATIN AMERICA MFIs:

• Are more commercial but less profitable as a group than all regions except Africa
• Barely reach Financial Self-Sufficiency
• Represent some of the most and least profitable MFIs across all regions.
• Adjustments for inflation, loan loss provisioning, subsidies and in-kind donations
create a basis for comparability of returns and sustainability in an industry where
diverse accounting policies, inflation and subsidy can distort performance.
• Before adjustments, Latin American MFIs, on average, recover 110%. After
adjustments, the Financial Self-Sufficiency (a measure of cost recovery) of the
average Latin American institution is 102%.

4. Revenue:
LATIN AMERICA MFIs:
• Earn more revenue as a percentage of total assets than all other regions
• Have some of the highest yields on the portfolio.
54
 • Latin American MFIs earn more revenue but keep less of it than regions with
positive returns.

5. Expense:
LATIN AMERICA MFIs:
• Pay the highest average cost for financing as percentage of total assets Achieve mixed
operational expense ratios.
• Latin American institutions are more costly to run, on average, because of the high
cost of financing coupled with widely varying operational expense ratios. The high
cost of financing for all Latin peer groups is not surprising; Latin American
institutions, on average, are more likely to access larger amounts of debt at
commercial rates than other regions.

6. Efficiency and productivity:

LATIN AMERICA MFIs:
• Serve borrowers more efficiently than all regions except Asia
• Employ the most productive loan officers of all regions except Africa, but
• Have fewer front line staff than all MFIs worldwide.
• Latin American MFIs appear efficient when operational expenses are divided by the
loan portfolio.
• The impressive productivity of Latin American loan officers is diminished at the
institutional level, where productivity is consistent with the average for all MBB
participants. Loan officers account for merely 41% of all Latin American MFI staff
compared to an average of 48.3% for all MFIs worldwide.

7. Portfolio:
LATIN AMERICA MFIs:
• Have the highest portfolio at risk
• Earn the highest loan loss provisioning expenses because the Gross Loan Portfolio
accounts for such a large percentage of total assets.
• The average Portfolio at Risk (PAR) > 30 days for Latin America is almost twice as
high as any other region.
• The Gross Loan Portfolio accounts for such a large majority of the assets of Latin
American MFIs, that provisioning expenses become even larger as a percentage of
total assets. High portfolio at risk also increases the risk profile of Latin American
MFIs to funding sources.

CONCLUSION:

The Latin American microfinance market is older, more developed and more diverse than
other regions yet there remain large geographical inequalities of access to financial services
55
at the national and regional scales. A minority of markets is already competitive
although increasing access through expanding the client base is still a principal challenge of
Latin American microfinance. Nowhere is this truer than in larger countries, secondary cities
and rural areas.

While there are some clear regional trends, the performance of Latin American MFIs is more
diverse than in any other region. In Latin America there is a true multiplicity of institutional
types, sizes, missions, and performance levels. Although there are examples of smaller Latin
American institutions that are very profitable, there seems to be a positive relationship, in the
aggregate, between size and Financial Self-Sufficiency.

7.3 INDONESIA:
Introduction:

BRI's ancestor, the Priyayi Bank of Purwokerto, was created in 1895 by Raden Wiriamaadya,
a Javanese government official. Intended for the Indonesian elite in its first years, the Dutch
administration reorganised it as a cooperative bank in 1897, following the example of those
that appeared in Europe after 1850. In 1946, it changed its name to Bank Rakyat Indonesia
and became a state-owned commercial bank in 1950. At the beginning of the 1970s, 3,600
BRI Unit Desas (village banks) were created as part of a government program, BIMAS,
whose aim was to provide inputs for the rice-green revolution. They were then used as
channelling agents for different subsidized government lending programs but all of them
failed to reach sustainability. In 1984, the Unit Desas were completely restructured: each
became an individual profit centre and adopted a commercial approach to microfinance (no
subsidies, sustainable interest rates, efficient management, and efforts to mobilize savings)
that led them to financial profitability from 1985 onwards. Today, BRI's microfinance system
is the world's largest and most profitable microfinance network in the world. In 1992, BRI
became a limited liability corporation and a public company in 2003.

Methodology:

BRI is divided into four Strategic Business Units: Micro Banking, Retail Banking, Corporate
Banking and Investment Banking. Its microfinance services are provided through the Micro
Banking Unit, also known as BRI Unit.

The main saving products available are:

• SIMPEDES, or Simpanan Pedesaan (Village Savings), a deposit instrument allowing

an unlimited number of transactions and therefore favoured by low-income
households that need full liquidity. There are no fees to open an account, and except
for the smallest balances (less than $10), it has a positive real interest rate. Aimed at
attracting new customers, lotteries are organized every six months with prizes in kind.
75.7% of BRI micro-banking accounts are SIMPEDES.
56
 • SIMASKOT, is the equivalent of SIMPEDES for urban areas with an
emphasis on security.
• TABANAS BRI, a government saving program, offers similar features than
SIMPEDES but is not as popular. It can be explained by the fact that until a few years
ago, no more than two withdrawals per month were allowed and, moreover, its lottery
offers prizes in cash whereas most depositors favour prizes in kind.

BRI has only one micro-loan product, KUPEDES, designed for working capital or
investment purposes. Carefully selected, the borrowers are given loans whose amount
depends on the borrower's current income flow and always require some form of collateral (a
SIMPEDES account, land, furniture, motorcycle, etc.). The minimum amount is Rp.25,000
(US$3), and the maximum is Rp.50,000,000 (US$5,000). The minimum loan term period is
one month and the maximum is 24 months for working capital loans or 36 months for
investment loans. Loans can be repaid in monthly, quarterly or bi-annually instalments. The
interest rate increased by 0.5% if the repayment is not made on time. The repayment rate is
very high: 98.34%.

Innovations:

BRI needs to keep a strong focus on micro and small banking activities to remain successful.
Another challenge is the dependency of the Micro banking division on BRI overall policy on
the use of units' profits and investments decisions. Instead of being allocated to loss-making
corporate activities, units' profits could be used to lower interest rates on credit, increase
deposit rates or invest in renovating and/or expanding the unit network. Other challenges for
BRI are: extending further its outreach in rural areas, bringing ICT to microfinance and
building linkages between large companies and small enterprises.

57
7.4 PAKISTAN:
Introduction:

The Pakistan Microfinance Network finds it origins in 1995 as an informal association based
on the exchange of thoughts and experiences between microfinance providers operating in
Pakistan.

In 1999 this loose collaboration, the Microfinance Group Pakistan, sought and received
financial support from the Aga Khan Foundation and the Asia Foundation. Through its
expanding and more formalized operations it continued to build confidence and trust amongst
donors, government and microfinance institutions. In 2001 it moved successfully to become
a separate legal entity under the name of the Pakistani Microfinance Network (PMN).

Type of Microfinance Products: Credit + Saving + Insurance

Lending Methodology: Community based + Individual

Saving Methodology: Mobilization + Intermediation

Insurance Products: Life + Health

Cost per Client: Globally competitive

58
Cumulative Recovery Rate: 96.4%

Total No. Of MFPs: 40

5 MFPs have 82% Market share

OBJECTIVE:
PMN pursues three objectives:
1. Enhancing the capacity of retail MFIs:
Through training courses, the network seeks to build up technical expertise and
disseminate operational best practices. During training events, members are also
encouraged to present historical overviews of their organisations, illustrate key issues in
their current operations and divulge financial information on their organisations.

In the past, PMN has organised training courses in market research, credit methodologies,
management skills, business planning and financial modelling and others. For 2004, it
proposes nine training courses, run by Pakistan practitioners and international trainers in
gender, financial management, credit operations, and business development services.

2. Developing and disseminating the use of performance measures and promoting financial
transparency in retail MFIs:

PMN started in 1999 to promote transparency among its members, asking them to self-
report their performance indicators, which are then aggregated, analysed and published
bi-annually as a nation-wide report, the Performance Indicators Report. It is widely
acknowledged that PMN is one of the leading national networks in the world in managing
and producing performance indicators for the microfinance industry.

3. Helping to create an enabling environment for retail MFIs:

PMN organises policy seminars on regulatory issues as well as nation-wide conferences,

and has representation on the Consultative Group for Microfinance run by State Bank of
Pakistan. In addition, PMN publishes position papers on issues reflecting a consensus
among its members.

Growth level:

59
Annual Growth level in Pakistan is almost 40%

Microfinance providers in Pakistan:

NGOs RSPs MFIs MICROFINANCE

BANK

 Sungi  NRSP  OPP  KB

 SAFWCO  SRSP  Akhuwati  First MFB
 TF  PRSP  Asasah  NetworkMFB
 Damen  TRDP  Kashf  Rozgar MFB
 AKRSP  P-O MFB

 Tameer MFB

PMN gathers 12 microfinance providers, including most of the largest and better-established
microfinance institutions in the country, representing a regional balance and approximately
90% of the outreach in Pakistan.

PMN members:

• First MicroFinanceBank Ltd. (FMBL)

• Development Action for Mobilization and Emancipation (DAMEN)

• Kashf Foundation

• National Rural Support Programme (NRSP)

• Orangi Pilot Project (OPP)

• Sarhad Rural Support Programme (SRSP)

• Sindh Agricultural & Forestry Workers’ Cooperative Organization (SAFWCO)

• Sungi Development Foundation

• Taraqee Foundation (TF)

• Thardeep Rural Development Programme (TRDP)

• Punjab Rural Support Programme (PRSP)

60
Some Innovative Products of Microfinance:

Product Action plan for Network Facilities for clients

working Infrastructure

Smart Card MFP Identification POS Terminal Cards as a source of

Number, Transaction virtual account
Confirmation code

Bank application
must be stored on
SIM, as over the air
SIM embedded with service cannot be Urdu based SMS can
bank account toolkit used due to illiteracy be used Phone + particular
factor. SIM for clients

Smart Card with POS Terminal:

 Disbursement Scenario
 Loan repayment or Savings Deposit Scenario

SMS based Transactions:

 Disbursement or Withdrawal (Cash-out)
 Loan repayment or Savings Deposit (Cash-in)

61
7.5 EUROPE:
Introduction:

Microcredit came to prominence in the 1980s as a tool to alleviate poverty in Asia, Latin
America and Africa. In Western Europe, a handful of organisations pioneered microcredit
schemes in the 1990s. The majority active today began lending in the present decade,
however. In this period, persistent unemployment and pressure on the welfare state focused
attention on microcredit as a tool to foster self-employment for financially and socially
excluded persons. Most funds receive public sector subsidies and many micro lenders focus
on promoting social and financial inclusion.

In Eastern Europe, microfinance began in the 1990s after the economic transition from
centrally planned to market economies, which led to large numbers of unemployed urban and
rural workers. Microfinance institutions were created with significant donor support. Their
purpose was to provide services to people not reached by formal financial institutions due to
the collapse of the financial sector. The priority was to create viable and sustainable financial
institutions that could reach large numbers of unemployed and poor workers.

Four different forms of microfinance business models existing in Europe:

• NGOs with a microfinance driven approach:

NGOs with a microfinance driven approach focus on serving clients with mainly
financial services. Some of these also have a very clear social mission.

• NGOs with a target group driven approach:

NGOs serve specific target groups (women, unemployed, ethnic minorities, micro
entrepreneurs, migrants, youth) with a range of services usually related to
employment. These NGOs include financial services in their overall programme.
Examples include institutions such as the microloan fund of the city of Hamburg
(Germany), Weetu (UK), IQ/Enterprise (Germany), Hordaland Network Credit
(Norway).

• Support programmes initiated in existing institutions and development banks:

It refers to existing institutions and development banks that have integrated support
programmes for micro and small enterprises in their regular portfolio. These
organisations have established special microcredit windows. Examples are the micro
and small enterprise programmes of Finnvera (Finland), KfW Bankengruppe
(Germany), BDPMEOséo (France) and ICO (Spain).

• Specialised units of banks:

62
 Here specialised units within banks disburse microloans directly or through
partner organisations. The model is prevalent in Spain, where savings banks such as
La Caixa, Caixa de Catalunya, BBK or Caja Grenada have played a leading role in
developing the sector.

Multi Dimensional Analysis:

 Identification of three typologies of MFI:

- Financial Institutions (FIs)

- Co-operative societies (COOP)

- NGOs, Associations, Foundations (NAF)

 Dimensions of analysis:

- SUSTAINABILITY (proxies): interest rate, repayment rate, n° of clients handled by

a staff member

- OUTREACH (proxies): n° clients, n° products, longevity MF program; depth of

outreach (av. loan size/average per-head GDP)

 Cross-analysis with the two dimensions and the three types of MFIs

 Interpretation of the cross analysis findings through the introduction of some

complementary variables those are:

 There is a Focus on clients

 There is an organized system of information collection on risky clients

 There is a marketing strategy

 There are types of collateral securities requested to collateralise the loans

granted

APPROCHES TO MICROFINANCE:

63
 INSTITUTIONAL
AIM:
MINIMALIST
FINANCIAL TYPE:
APPROACH
SELF SUFFICIENCY BANK

AIM:
INSTITUTIONAL
TO REACH A
MAXIMALIST TYPE:
SPECIFIC TARGET
APPROACH ASSOCIATIONS
OF CLIENTS
FOUNDATIONS
(poverty alleviation
AND NGO
paradigm)

Brief Summary:

 56% of the MFIs offer financial services only

 44% of the MFIs offer credit and non financial services

 7% are Banks; 43% NGOs, Foundations and Associations; 50% Non-bank Financial
institutions and co-operatives

 Average loan amount is about 13.000 €

 53% of the loans are lower than 10.000 €

 Average interest rate: 5.5%

 Average repayment rate: 89.7 %

 Average longevity of programs: 95 months

64
7.6 BANGLADESH:
INTRODUCTION:

Mufiya Khatoon—a poor, illiterate young woman in rural Bangladesh—used to spend her
days begging for a few ounces of rice to feed her children. She desperately wanted a
livelihood, but lacked the funds to start a small business, and there was nowhere she could
borrow on terms she could afford. That is, until she discovered Grameen Bank, one of the
first microfinance institutions (MFIs), which set up shop in rural Bangladesh in the wake of
the 1976 famine.

In 1979, Grameen made Mufiya a one-year loan of 500 taka (about $22), enough to start a
bamboo business. To qualify, she had to form a group with four others in similar
circumstances. She paid an interest rate of 20 percent, with repayments of 2 percent of the
loan each week. Stiff terms perhaps, but better than the 150 percent interest rate a local
money lender would have demanded. Mufiya was able to start her bamboo products business
and, one year later, she repaid her loan.

Microfinance gave Mufiya—as it did to millions of other poor people with no credit history,
collateral, or steady income—access to basic financial services. Most mainstream banks have
considered the poor high-risk and hard to serve because they often live scattered across
remote areas and because the small loans they need are costly to make and maintain. But
microfinance, which specializes in providing small loans and other financial, services even to
the world’s most destitute, challenges those traditional assumptions.

OBJECTIVE:

• Microfinance has mushroomed from Grameen's tiny non-profit experiment in

Bangladesh to a global industry.

• They believe that microfinance is an important tool in the effort to end world
poverty.

65
CURRENT SCENARIO:

• Today, microfinance players at Bangladesh include governments, philanthropists,

social investors, and commercial banks, such as Citicorp and ING, that are attracted
by the potential for profit and corporate social responsibility.

• Customers can still go to a Grameen-type bank, but they can also go to microfinance
credit unions, public sector and commercial banks, and, relatively recently, Islamic
banks (which apply Islamic financial principles, such as risk sharing).

• Besides tiny business loans, MFIs offer deposit, savings, pension, and insurance
products.

• Micro insurance is growing because borrowers need to insure assets such as farming
equipment that they purchase with microcredit.

• Microfinance customers live in both rural and urban areas—the rural poor borrow for
cattle fattening, dairy farming, bamboo making, or weaving, whereas the urban poor
borrow to become street vendors, rickshaw drivers, or seamstresses.

• The number of MFIs operating today is estimated to range anywhere from 300 to
25,000, depending on the definition. The Microfinance Information eXchange (MIX),
known as the "Bloomberg" of microfinance, reports on nearly 1,000 microfinance
institutions worldwide, nearly half of which are self-sustainable. The number of
borrowers is hard to pin down, with estimates ranging from 30 to 500 million.

METHODOLOGY:

 APPROACHES: They have adopted two basic approaches:

1. Group lending.
• Grameen Bank is considered the pioneer of the group lending model, which
has now been adopted in many countries. Individual borrowers are required to
form a group and take responsibility for each other's loans.

• Grameen Bank depends primarily on peer pressure to guarantee repayment.

Moreover, it limits risk by targeting female borrowers, who are considered
more reliable because of family-based community ties.

• In early 2008, Grameen Bank reported almost 7 million borrowers—96

percent of them poor, illiterate women from remote villages. And since 1976,
it says, $6 billion has been lent, with a repayment rate of 98 percent.

66
2. Individual lending:
• Typical borrowers are not the very poor seeking to start businesses, but the
self-employed poor who are skilled business people. In some cases, the
borrower has a small amount of collateral.

• Incentives such as the possibility of borrowing progressively larger amounts

and the opportunity to get business and vocational training encourage
repayment.

 SCALE AND FINANICAL INSTRUMENTS:

• Commercial players are using point-of-sale devices and mobile phones to

connect with the rural poor, licensing local merchants and shop owners to make
cash transactions on their behalf.

• Technology will likely reduce transaction costs, allowing MFIs to grow and
reach more customers.

• The interest rates on microloans range from 20 percent to 35 percent (even

after adjusting for inflation). MFIs are subject to significantly higher costs than
commercial banks, because of lending and administrative costs (for example,
identifying and screening clients).

67
 CHAPTER 8
Role, Functions and Working Mechanism of Financial
Institutions:
8.1 ICICI Bank:
“ICICI Bank is one bank that has developed a very clear strategy to expand the provision of
financial products and services to the poor in India as a profitable activity”

- Haruhiko Kuroda, President, Asian Development Bank.

ICICI’s microfinance portfolio has been increasing at an impressive speed. From 10,000
microfinance clients in 2001, ICICI Bank is now (2007-08) lending to 1.8 million clients
through its partner microfinance institutions, and its outstanding portfolio has increased from
Rs. 0.20 billion (US$4.5 million) to Rs. 9.98 billion (US$227 million). A few years ago,
these clients had never been served by a formal lending institution.

There is an increasing shift in the microfinance sector from grant-giving to investment in the
form of debt or equity, and ICICI believes grant money should be limited to the creation of
facilitative infrastructure. “We need to stop sending government and funding agencies the
signal that microfinance is not a commercially viable system”, says Nachiket Mor,
Executive Director of ICICI Bank.

As a result of banks entering the game, the sector has changed rapidly. “There is no dearth of
funds today, as banks are looking into MFIs favourably, unlike a few years ago”, says
Padmaja Reddy, the CEO of one of ICICI Bank’s major MFI partners, Spandana.

The Future:

68
These agents contact several borrowers, thus expanding the reach of ICICI Bank at a
low cost. Taking the FSC(Farmer Service Centers) initiative further, ICICI Bank plans to
provide farmers credit from sugar companies, seed companies, dairy companies, NGOs,
micro-credit institutions and food processing industries.

SIG has been involved in a project in the southern state of Tamil Nadu to find out how
wireless technology can be applied in the development of low cost models of banking.
Another plan to increase the reach in rural areas is to launch mobile ATM services. ICICI
Bank branded trucks have started carrying ATMs through a number of villages

MODELS USED BY ICICI BANK:

• Bank Led Model:

The bank led model was derived from the SHG-Bank linkage program of NABARD.
Through this program, banks financed Self Help Groups (SHGs) which had been
promoted by NGOs and government agencies. ICICI Bank drew up aggressive plans
to penetrate rural areas through its SHG program. However, rather than spending time
in developing rural infrastructure of its own, in 2000, ICICI Bank announced merger
of Bank of Madura (BOM), which had significant presence in the rural areas of South
India, especially Tamil Nadu, with a customer base of 1.9 million and 87 branches.

Bank of Madura's SHG development program was initiated in 1995. Through this
program, it had formed, trained and initiated small groups of women to undertake
financial activities like banking, saving and lending. By 2000, it had created around
1200 SHGs across Tamil Nadu and provided credit to them.

• Partnership Models:

A model of microfinance has emerged in recent years in which a microfinance

institution (MFI) borrows from banks and on-lends to clients; few MFIs have been
able to grow beyond a certain point. Under this model, MFIs are unable to provide
risk capital in large quantities, which limits the advances from banks. In addition, the
risk is being entirely borne by the MFI, which limits its risk-taking.

This model aimed at synergizing the comparative advantages and financial strength of
the bank with social intermediation, mobilization power and infrastructure of MFIs
and NGOs. Through this model, ICICI Bank could save on the initial costs of
69
 developing rural infrastructure and micro credit distribution channels and
could take advantage of the expertise of these institutions in rural areas. Initially,
ICICI Bank started off by lending to MFIs and NGOs in order to provide the
necessary financial support to their activities. Later, ICICI Bank came up with a plan
where the NGO/MFI continued to promote their microfinance schemes, while the
bank met the financial requirements of the borrowers.

• Other Microfinance Initiatives

As a part of microfinance initiatives in the agriculture sector, ICICI Bank developed

Farmer Service Centres (FSC). An FSC was managed by an agricultural input supply
company which supplied inputs like seeds and technical knowhow to the farmers.

FSCs were also managed by an extension service organization which provided inputs,
credit and technology or by an NGO that provided all the services that farmers needed
for their agricultural needs. Working in close association with farmers, FSCs provided
them with services like advice on seeds, sowing techniques, pest control, weed
control, usage and dosage of herbicides, pesticides and fertilizers and other services
associated with agriculture.

The FSCs also provided crop-related information and services to farmers, apart from
facilitating the sale of agricultural produce.

The FSCs arranged to procure the produce through agents and sold it in organized
agricultural markets thus getting better realization.

INNOVATIONS:

1. ICICI Bank to offer micro-finance to sex-workers:

• In a novel way to help sex-workers to live more meaningfully, country's largest

private sector bank, ICICI Bank is planning to offer financial assistance to them
though the micro-finance route.

• For starters, the bank plans to launch the programme in Kolkata by entering into a tie-
up with Durbar Mahila Samwanaya Samitee, an NGO working for the welfare of
around 65,000 sex-workers in and around the city.

2. ICICI Bank launches new initiative in micro-finance:

• ICICI Bank has taken a stake of under 20 per cent in Financial Information Network
and Operations Private Ltd (FINO)

70
 • FINO would provide technological solutions as well as services to finance
providers to reach the underserved in the country. ICICI Bank is the lead facilitator.

• ICICI Bank expects to target 200 micro-finance institutions (MFIs) by March 2007.
At present, the bank has tie-ups with more than 100 MFIs.

• FINO is an initiative in the micro-finance sector. It would target 300-400 million

people who do not have access to basic financial services. The company has an
authorised capital of Rs 50 crore. MFIs, NBFCs, RRBs, co-operative banks, etc
would directly or indirectly tie up with FINO to use its services. FINO would charge
Rs 25-30 per account every year.

• Core banking products:

FINO has partnered with IBM and i-flex to offer core banking products. It would also
provide credit bureau services, which includes individual customer credit rating and
analytics based on transaction history. It also launched biometric cards for customers,
which would be a proof of identity and give collateral to them. The card would also
offer multiple products including savings, loans, insurance, recurring deposits, fixed
deposits and remittances. The company would also build-up customer database, thus
bringing them into mainstream banking.

The company expects to reach 25 million customers in five years and two million
customers by the end of 2007.

3. ICICI Bank's thrust on micro-finance:

• ICICI Bank has entered into partnerships with various microfinance institutions (MFI)
and non-Government organisations (NGOs) to scale up its micro lending business.
The partnership model would provide assured source of funding to NGOs and MFIs.
The bank had extended advances to the tune of Rs. 150 crores.

• The bank had acquired a network of self-help groups (SHGs) developed by the
erstwhile Bank of Madura after its merger with ICICI Bank. Since then the SHG
programme had grown substantially and 10,175 groups had been promoted reaching
out to 2.03 lakhs women spread across 2,398 villages.

• ICICI Bank has entered into a memorandum of understanding with Microcredit

Foundation to outsource SHG development, maintenance of groups, credit linkage
and recovery of loans.

CHARACTERISTICS:

• The MFI as Collection Agent:

71
 ICICI Bank initiated a partnership model in 2002 in which the MFI acts as a
collection agent instead of a financial intermediary. This model is unique in that it combines
debt as mezzanine finance to the MFI (Mezzanine finance combines debt and equity
financing: it is debt that can be converted by the lender into equity in the event of a default.
This source of financing is advantageous for MFIs because it is treated like equity in the
balance-sheet and enables it to raise money without additional equity, which is an expensive
financing source.)

The loans are contracted directly between the bank and the borrower, so that the risk for the
MFI is separated from the risk inherent in the portfolio. This model is therefore likely to have
very high leveraging capacity, as the MFI has an assured source of funds for expanding and
deepening credit. ICICI chose this model because it expands the retail operations of the bank
by leveraging comparative advantages of MFIs, while avoiding costs associated with entering
the market directly.

• Securitization:

Another way to enter into partnership with MFIs is to securitize microfinance

portfolios. In 2004, the largest ever securitization deal in microfinance was signed
between ICICI Bank and SHARE Microfinance Ltd, a large MFI operating in rural
areas of the state of Andra Pradesh. Technical assistance and the collateral deposit of
US$325,000 (93% of the guarantee required by ICICI) were supplied by Grameen
Foundation USA.

Under this agreement, ICICI purchased a part of SHARE’s microfinance portfolio

against a consideration calculated by computing the Net Present Value of receivables
amounting to Rs. 215 million (US$4.9 million) at an agreed discount rate. The interest
paid by SHARE is almost 4% less than the rate paid in commercial loans. Partial
credit provision was provided by SHARE in the form of a guarantee amounting to 8%
of the receivables under the portfolio, by way of a lien on fixed deposit. This deal
frees up equity capital, allowing SHARE to scale up its lending. On the other hand, it
allows ICICI Bank to reach new markets. And by trading this high quality asset in
capital markets, the bank can hedge its own risks.

• Beyond Microcredit:

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

• Technology:

72
 One of the main challenges to the growth of the microfinance sector is
accessibility. The Indian context, in which 70% of the population lives in rural areas,
requires new, inventive channels of delivery. The use of technologies such as kiosks
and smart cards will considerably reduce transaction costs while improving access.
The ICICI Bank technology team is developing a series of innovative products that
can help reduce transaction costs considerably. For example, it is piloting the usage of
smart cards with SEWA Bank in Ahmedabad. To maximize the benefits of these
innovations, the development of a high quality shared banking technology platform
which can be used by MFIs as well as by cooperatives banks and regional rural banks
is needed. ICICI is strongly encouraging such an effort to take place. Wipro and
Infosys, I-Flex, 3iInfotech, some of the best Indian information technology companies
specialized in financial services, and others, are in the process of developing exactly
such a platform. At a recent technology workshop at the Institute for Financial
Management Research in Chennai, the ICICI Bank Alternate Channels Team
presented the benefits of investing in a common technology platform similar to those
used in mainstream banking to some of the most promising MFIs.

• The Centre for Microfinance Research:

ICICI bank has created the Centre for Microfinance Research (CMFR) at the Institute
for Financial Management Research (IFMR) in Chennai. Through research, research-
based advocacy, high level training and strategy building, it aims to systematically
establish the links between increased access to financial services and the participation
of poor people in the larger economy. The CMFR Research Unit supports initiatives
aimed at understanding and analyzing the following issues: impact of access to
financial services; contract and product designs; constraints to household
productivity; combination of microfinance and other development interventions;
evidence of credit constraints; costs and profitability of microfinance organizations;
impact of MFI policies and strategies; people’s behaviour and psychology with
respect to financial services; economics of micro-enterprises; and the effect of
regulations.

Finally, the CMFR recognizes that while MFIs aim to meet the credit needs of poor
households, there are other missing markets and constraints facing households, such
as healthcare, infrastructure, and gaps in knowledge. These have implications in terms
of the scale and profitability of client enterprises and efficiency of household budget
allocation, which in turn impacts household well-being. The CMFR Microfinance
Strategy Unit will address these issues through a series of workshops which will bring
together MFI practitioners and sectoral experts (in energy, water, roads, health, etc).
The latter will bring to the table knowledge of best practices in their specific areas,
and each consultation workshop will result in long-term collaboration between with
MFIs for implementing specific pilots.

73
8.2 YES Bank
Innovative Partnership Models to Access Rural Markets:

 Enabling Financial Inclusion:

An Inclusive Financial sector is one that helps people help themselves to increase
incomes, acquire capital, manage risk and work their way out of poverty through:

o Safe savings

o Appropriately designed loans for poor and low-income households and micro,
small and medium enterprises

o Appropriate insurance and payment services

 Tools for Inclusion – Microfinance

 Globally, many traditional commercial banks have restructured policy and practice to
serve the Bottom of Pyramid (BOP) market through Microfinance

 Banks have successfully used direct intervention in ‘downscaling’ to reach low-

income populations by restructuring organizational frameworks to leverage existing
infrastructure, human resources and relationships

 Tools for Inclusion – Contract Farming:

74
Typical Contract Farming - Risks/Short Comings
 Crop Failure/Crop damage
 Complex Insurance schemes
 Crop Diversion
 Market price more than contracted price
 Willful
 Problems with/without the input supplier
 Push sales at the expense of the farmers
 Loans may not be used for agri purposes

Solution as per YES BANK’s Model for Contract Farming:

 Risk sharing by the output buyer
 Output buyer to supply the inputs as well
 Price offered to be contracted price or the market price whichever is higher
 Stringent law enforcement for willful defaults
 Output buyer should look at contract farming as a source of good quality raw material
not as source of cheap raw material.

75
 1. Financial inclusion:- Challenges
Challenges of Delivery:
 Under utilization of Physical & Banking Infrastructure:
 High delivery costs, legacy systems, inflexible procedures
 Information Asymmetry:
 No credit history, willful defaulting, unclear Government policies

Challenges of Product Design:

 Lack of Collateralizable Assets:
 No ownership documents, illiquid assets, inaccurate valuation
2. Financial inclusion:- Solution
 Leverage Existing Banking Infrastructure
 Mindless investment in branch network without optimal utilization will not
help solve the problem of financial exclusion
 There is a need to:
 ‘Sweat’ existing branch infrastructure
 Extend outreach
 Evolve customized products tailored to meet the requirements of low-income clients
 Microfinance is an efficient tool Inclusive Growth
 Leverage Partnerships

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  Leverage Technology

YES MICROFINANCE INDIA

Innovative Solutions: For extending Deposit Products

• Challenges:
 Dispersed client based with poor access
 Limited electricity supply and access
 Limited telecom/broadband connectivity
 ATMs may not be viable and maintainable in erratic power situations
 Cash collection points – customers like to deposit at a fixed location
 Banking service – delivery of information , statements, etc
 Access to account in nearby cities, towns villages

• Mitigation:
 Mobile Branches covering select geographies
77
  Self generated - Diesel , Solar, Battery
 Online/Offline and Pseudo online data capture and updating systems. Leverage
Mobile networks
 Cash dispensing partners e.g. Post offices who can deliver cash like money orders
 Cash can be deposited at partners like Post offices/Mobile Branches
 Information dissemination through partners, Internet kiosk enabled, Toll Free Call
centre in local language
 ATM cards for such customers

Innovative Solutions: for extending Loan Products

• Challenges:
 Loan delivery - Cash is preferred form at Village Level
 Loan servicing- Payments collection to suit every form of repayment from daily, to
weekly to seasonal
 Loan Management and updation of information of payments and collections and
sharing update with every borrower at village level
• Mitigation:
 Loan can be delivered on Card; customer can avail cash from nearest partner - Post
office/ATM/ Cash advance terminal like POS
 Enlisting partners like Post offices and Roaming agents who can use offline/ online
handheld devices to update loan repayments on the field
 Deliver the loan history on a smart chip card. Information on the same can be read off
and printed off handheld readers

8.3 GRAMEEN BANK:

The Grameen Model which was pioneered by Prof Muhammed Yunus of Grameen Bank is
perhaps the most well known, admired and practised model in the world. The model involves
the following elements.

• Homogeneous affinity group of five

• Eight groups form a Centre

• Centre meets every week

• Regular savings by all members

• Loan proposals approved at Centre meeting

• Loan disbursed directly to individuals

78
• All loans repaid in 50 instalments

The Grameen model follows a fairly regimented routine. It is very cost intensive as it
involves building capacity of the groups and the customers passing a test before the lending
could start. The group members tend to be selected or at least strongly vetted by the bank.
One of the reasons for the high cost is that staff members can conduct only two meetings a
day and thus are occupied for only a few hours, usually early morning or late in the evening.
They were used additionally for accounting work, but that can now be done more cost
effectively using computers. The model is also rather meeting intensive which is fine as long
as the members have no alternative use for their time but can be a problem as members go up
the income ladder.

The greatness of the Grameen model is in the simplicity of design of products and delivery.
The process of delivery is scalable and the model could be replicated widely. The focus on
the poorest, which is a value attribute of Grameen, has also made the model a favourite
among the donor community.

However, the Grameen model works only under certain assumptions. As all the loans are
only for enterprise promotion, it assumes that all the poor want to be self-employed. The
repayment of loans starts the week after the loan is disbursed – the inherent assumption being
that the borrowers can service their loan from the ex-ante income.

8.4 OBC (ORIENTAL BANK OF COMMERCE):

OBC has disbursed about 6930.05 crores for agricultural lending by March 2008. In the year
2007-2008, it had provided agricultural credit of 1794.94 crores by adding 66,255 new loans
through 316 semi-urban and 273 rural branches. OBC had started various schemes for
agricultural and rural sector lending. The important schemes are:

• Oriental Green Card (OGC) under KCC:

This scheme is launched to benefit farmer by the provision of loans for crop
production, working capital requirement for allied activity and consumption purposes.
In 2007-2008, OBC had issued 54,634 OGCs. The total credit disbursed in this
scheme in 2007-2008 is Rs. 662.99 crores. By March, it had disbursed a total of 4,
95,275 OGCs.

• Oriental Kishan Gold Cards (OKGCs)

79
 This scheme is launched to meet the credit need of farmers for working
capital and investments. By March 2008, OBC had disbursed 4771 OKGCs. The
credit disbursement through OKGCs in 2007-2008 was Rs. 28.20 crores.

• Agriclinic and Agribusiness Centres:

OBC had provided credits to agriculture students for setting of Agriclinic and
Agribusiness Centres. By March 2008, 54 Agriclinic and Agribusiness were
established under the finance of OBC which was Rs. 673.14 lakh.

• Hi-Tech Dairy:

For increasing the self-employment of the rural youth, OBC had started this scheme
in the state of Punjab as a pilot project in collorabation with Punjab State Dairy
Development Board. By March 2008, OBC had disbursed Rs. 37.56 crores to 349
dairy units.

• Oriental Saur Urja Dohan Scheme:

OBC in collorabation with an NGO, Bhartiya Vikas Trust, started financing the
implementation of solar water heating and lighting system; and disbursed Rs. 16.15
lakh to benefit 153 units.

• Oriental Bank Grameen Project

OBC had formed 3864 SHGs in 356 villages, and advanced Rs. 26.67 crores to these
groups by March 2008. Also, it mobilized savings from these groups to the tune of
Rs. 6.00 crores by the same period.

• Advances to weaker sections:

In 2007-2008. OBC had advanced Rs. 2337 crores to the poor and marginalized
consisting of SCs, STs, Landless labourers, small and marginal farmers, rural artisans
under government- sponsored PMRY scheme. Under the same scheme, it had
disbursed Rs. 1695 crores in 2006-2007.

• Differential Rate of Interest schemes:

OBC had provided credit to poor families (having annual income of Rs 6500) at the
rate of interest of 4% per annum. At the end of March 2008, it had disbursed Rs.
123.24 crores under this scheme.

• Loan to SCs and STs:

OBC had sanctioned Rs.452.40 crores in 2007-2008 and Rs. 437.62 crores in 2006-
2007 to SCs and STs.

• Prime Minister Rozgar Yojana (PMRY):

80
 To enchance self-employment opportunities for urban poor, OBC had
channelized Rs. 7.60 crores in 2007-2008 benefiting 2192 persons.

• Swarna Jyanti Gram Swrojgar Yojana:

Under this government scheme, OBC had provided financial assistance to 1511
individuals and 351 SHGs by financing Rs. 5.55 crores and Rs. 5.84 crores
respectively.

8.5 ANDHRA BANK IN MICROFINANCE:

Andhra Bank has number of schemes under the microfinance and agriculture lending. The
schemes are:

1. AB Mahila Soubhagya:
Under this scheme, the bank finance Women SHGs with 10% interest per annum without
any collateral and margin (for Rs. 5 lakhs per SHG). The repayment period is years in
monthly installments.

2. AB Kisan Rakshak:
The objective of this scheme is to finance farmers to repay the loan which they have
taken from non-institutional financial sources like money lenders.

3. AB Kishan Vikas Card:

This scheme is launched to provide short term crop production credits to farmers.

4. AB Pattabhi Agricard:

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Under this scheme, the card holder can draw cash for purchasing of agricultural
inputs against the card.Also the card holder is covered with “Accident Insurance Benefit”
of Rs. 1, 00,000 which is governed by Andhra Bank’s insured Current Product Scheme.
However, this insurance is optional to the borrowers. Again, all the farmer borrowers are
covered under Personal Accident Insurance Scheme (PAIS)

5. AB Kishan Chakra:
This scheme finance farmer for purchase of two-wheeler motor bikes or four wheeler
motor cars.

6. AB Rural Go downs:
Under this scheme, farmers and individuals are financed to construct go downs for storing
and marketing of agricultural commodities.

7. AB Kishan Sampathi:
This scheme provides credit to farmers against distress sale of crops (paddy, groundnut,
rape seed, mustard Bengal gram, arhar, turmeric, dry chilies, maize, black gram and
jaggery).

8. AB Kishan Bandhu:
Andhra bank finances farmers for the purchase of tractors.

9. AB SHG-Bank Linkage Programme:

Under this scheme, Andhra Bank provides credit to SHGs and allows them to open their
saving account in the bank.

Apart from these schemes, Andhra Bank also has many other schemes (AB Bank Kisan
green card, AB surya Sakthi, AB solar cookers, AB finance purchase of land for Agri
purpose, AB for financing dairy Agents etc) for women and marginalized.

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8.6 FRIENDS OF WOMEN’s WORLD BANKING (FWWB) (MFIs):
Introduction:

The 1975 International Women’s Conference in Mexico City which brought together like-
minded women leaders from across the world culminated into formation of Women’s World
Banking (WWB) in 1980. The FWWB was created to address the hitherto unmet needs of
economically active but poor women’s access to financial services thereby enabling them to
engage in productive economic activities. In 1982 Friends of Women’s World Banking, India
(FWWB-I) was created as one of the first few affiliates of Women’s World Banking.

For the first seven years of

its operations from 1982 to
1989 FWWB’s activities
were limited to providing
loan guarantees for poor
women in the state of
Gujarat. Around this time,
the initial efforts started off
in 1970s to provide
financial access to poor
women especially those in

83
 unorganized sector were transformed into the women focused and savings-led Micro
Finance Movement.

During this decade different delivery models of financial services-Self Help Groups, Co-
operatives (including Banks) were established and they clearly showed that poor women
were bankable. Therefore in 1989, FWWB India’s bye-laws were modified to enable it to
become a National private apex institution to extend and expand informal credit supports and
networks within India to link them to a global movement.

Vision
A society based on equity and social justice where women are active partners in holistic
development.
Mission
Providing financial and capacity building services to organizations promoting livelihoods and
self-reliance of poor women.

Working of FWWB
• Wholesale MF Lending – Through revolving loan fund (RLF), FWWB
provides bulk loans to partner NGO/MFIs to reach out to their women members for
their sustainable income generation activities.
• Capacity Building – Institutional development of partner NGO/MFIs is taken
care through whole gamut of Capacity Building inputs such as formal technical
trainings on topics related to managing micro-finance program, exposure visits to best-
practice organizations, Technical Assistance provided by the team.
• Institutional Support – FWWB’s comparative niche lies in identifying and
nurturing nascent organizations by providing them loan and grant funds and at the
same time building the capacities to become financially sustainable organizations.
Towards this end FWWB supports operational deficit , infrastructure support and
establishment of system
• Research & Documentation – Impact/Assessment studies, research on
sectoral issues are regularly undertaken by FWWB. Documentation of these research
paper/studies is done with a view of disseminating the final outcome to the community
at large.
• Livelihood & Enterprise Development (LEAD)- In its continuous endeavor
to provide quality financial services to the poor women clients throughout the country,
FWWB has launched LEAD (Livelihood & Enterprise Development) program. Under
this program we support organizations working in micro-enterprise activities with the
economically disadvantaged women entrepreneurs.

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• Networking and Referral Services – FWWB periodically organizes
consultations, workshops & seminars which provides enabling environment for
partners to interact and exchange views with various stakeholders of microfinance
sector and also with government bodies & funding agencies. Being FWWB’s partner
provides credibility and enables partners to access funds from other sources.
• Social Security Initiatives - Over the year’s MF has been able to provide
financial service such as credit & savings to women of low income households but it is
yet to provide the safety net to these women and their families who are otherwise
vulnerable to various risk factors. FWWB firmly believes that this safety net can be
spread through various micro-insurance schemes and pension plans for which it
encourages and facilitates linkages of insurance providers with its partner
organizations.

Training and Workshops

FWWB’s Capacity building focuses on two major areas,

Trainings conducted by FWWB (SHG Training): To strengthen self-governance of

poor women and to enhance the capacity of the SHG’s to help them function
effectively.

Training for FWWB’s Partner Micro Finance Institutions (MFIs) by FWWB

(Credit Management Training): To build the capacity of MFI’s to reach self-
sustainable level which can help them in managing their micro finance activities in an
effective way and reach to a larger number of poor women more effectively. Here the
MFIs who are intermediaries are trained in efficient management of financial services
to the poor.

Workshops:
Workshops also form an important part of the capacity building programme where not
only the partner organisations but also sometimes the women at the grass root level get
a much wider platform to understand and interact and share their experiences and learn
from each other. They can discuss and debate on issues related to the sector and this
also helps in exploring the potential in the sector.

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NEW INITIATIVE:

WEATHER INSURANCE:

FWWB has extended agriculture loans to Maharashtra Partner Organisations since last
two years. The 3 main POs i.e. Asmita Institute of Development, Priyadarshini Mahila
Mandal and Navchetana are operating in Yavatmal District i.e. Vidarbha region which
is a drought prone area. In total all three organisations have a membership base of 9000
women. Looking to the nature of the loans FWWB initiated the talks for Weather
Insurance Product cover to these MFIs. Accordingly, details were called for from the
POs regarding the types of crops harvested by their members, average land holding and
their feedback on what parameters to be covered under the Weather Insurance Product.
An orientation workshop was organized wherein Cardinal Edge, a private company
having experience in designing and implementing Weather Insurance products was
specially called as a resource person.

Subsequently, FWWB started the talks with Cardinal Edge Services to develop such a
product for the above mentioned 3 POs. At present, Cardinal Edge has initiated talks
with AIC to provide Insurance cover. However, the market survey. Market sizing and
clients feedback needs to be carried out in order to underwrite the Weather Insurance
Product. The talks are on verge of finalization. As scheduled, the field survey and
clients feedback data has been collected and analyzed. The product is on verge of
completion and the test check of the product shall be carried out in the next agriculture
season.

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8.7 VARDAN TRUST:

The Company:

VARDAN is a 'fast-track' Grameen Bank-

type micro finance institution exclusively for
lower income households, designed to break-
even financially within 2 years by providing
at least 1,00,000 poor, urban & rural
community with efficient financial services,
while at the same time creating a
professionally managed, sustainable
microfinance institution.

VARDAN is structured as a Trust on February 23rd, 1998 under Mumbai Public Trust Act,
1950 and initially focused on women’s empowerment, child development and natural
resource management in the state of Gujarat in India. Recognizing that 62 percent of
Gujarat’s population does not have access to financial services, Vardan Trust began offering
microfinance in 2003, and today the institution is focused entirely on microfinance.
Vardan Trust offers basic income-generating loans to more than 10,000 customers, including
farmers, small shop owners, artisans, vegetable vendors, and those engaged in animal
husbandry.
Currently operating in northeast Gujarat, Vardan Trust has plans to expand throughout
Gujarat and to other states in India in the future. Presently, VARDAN is working in Dahod
and Panchmahal District of Gujarat state of India. Vardan have 11 branches.

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Vision:
To provide financial services to lower income households in a sustainable manner.

Mission by 2006-10:
• To provide financial services to 2,20,000 lower income households

• To work as a gender and caste neutral organization in urban and rural areas.

Core Values:
•• • Transparency in operation

•• • Participation of community

•• • Commitment for social welfare

PRODUCTS & SERVICES:

• Agriculture Loan :

Agriculture plays significant role in rural livelihood. Vardan Micro Finance has
developed agriculture loans, agriculture support loan and agriculture improvement
loan.

• • Seasonal loan :

Rural livelihood is get affected by season variations. To support their livelihood and
economic status Vardan Micro finance has seasonal loan for its clients.

• Subsistence loan :

Lower income household's economy is cyclic. To provide assistance to support their

economic status Vardan is providing subsistence loan to them. This loan helps them
to reduce migration and assets creation.

• Animal Purchase Loan :

Animal supports the economic and social status of lower income household. Vardan
is providing loan to its clients for animal purchase and fodder supports etc.

• Migration support loan :

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 Vardan is working in tribal dominated backward area. Tribal population migrated to
different areas in search of livelihood. This migration affects their livelihood and
• culture. Vardan Micro Finance is providing migration support loan to the emigrant
families to stabilize their household income and choose the suitable profession.

• Equipment purchase loan :

Traditional skills labours face problem of credit to purchase equipments to increase
income. Sometimes to purchase equipments put them in debt trap. Vadan Micro
Finance provides credit support to purchase equipments or to repay their debt.

• Debt repayment Loan :

Rural lower income household sometimes comes under debt trap Due to non access
to formal credit system needy people take loans from money lenders. Vardan Micro
Finance provide loan to repay those debts and come under the micro finance
programme.

• Working capital loan :

Small entrepreneurs require working capital to increase their income and business
activity. Vardan Micro Finance provide working capital loan to needy entrepreneurs
who do not have access to formal credit system

• • General Loan :

Some time lower income households require credit to fulfill their general demands.
This will directly and indirectly affects their social and economic status. Vardan
Micro Finance provide general loan to lower income households.

OUT RECAH & NETWORK:

Vardan trust is working in TWO districts with 11 branches and one head office:

89
Sr. Particular Figures / Information
General
1 Name of chief functionary Mahesh Vara
2 Legal Status & Year of establishment Trust
3 Regd. No. /FCRA No. /PAN No. Reg No. 1197PAN No.
AAATV94E
4 Year of commencement of mf program 2003
5 Year of association with FWWB 2003
6 Methodology (SHG/Grameen/MACS) Grameen/JLG/SHG
7 Other product/services No
8 Other focus areas, if any No
FWWB, ICICI, HDFC,
9 Major funding agencies
HSBC
10 Board membership & composition 5
Outreach

11 branches, 2 districts, 1
1 No. of branches/ districts/ & state
state
2 Total SHGs/JLGs/MACs 1,535
3 Total membership 9,574
4 Total no. Borrowers 8,285
5 Total staff in MF programme 94
6 Cumulative disbursals 75,030,246
7 Portfolio outstanding 34,781,592
8 FWWB outstanding 12520842/=
9 Outstanding borrowings 34781592/=
10 Outstanding savings 5,912,871
11 Interest charged to borrowers 18% F.R.
12 Avg. loan size 4,198

Financial Performance
1 Net Worth 1,136,192/=
2 Repayment Rate 98.71
3 Portfolio at Risk (> 30 days; > 60 days) 0.01
Yield (Income from operations/Avg. 28.50
4
Portfolio Outstanding
5 Operating Cost Ratio 5.6
6 Operational Self Sufficiency 48.47

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8.8 VIKAS DEVELOPMENT CENTER (NGOs):

Introduction:

VIKAS established in the year

1978 to address the issues of
poverty through education and
economic development. In
order to translate the vision
VIKAS has setup Saline area
Vitalization Enterprise Ltd.
(SAVE) a techno – marketing
support organisation and
programme on micro credit
within VIKAS called Lok
Vikas Nidhi (LVN).N).

They are presently forming in the Urban Areas –

Ahmedabad, Surat Baroda, Kheda, Anand , Mehsana and Gandhinagar.

Gujarat is one of the highest urban states of India (38% urban). It attracts people
from rural areas who come in search of employment. These migrants unable to
find suitable place to live in the city centre have to make do in hutments, shanties

91
or even pavements.

With recent efforts to strengthen urban infrastructure and re-organise urban

development slum dwellers are being shifted to locations far away from their
work places.

Visioning the future for Vikas Development Centre

⇒ Internal organization.
⇒ Resource constraints
⇒ Partnership formation
⇒ Protection of trade and occupation
⇒ Introduction of income generating activities.

MICRO-CREDIT MODEL

They follow a self help group model which operates through decentralized
organisation structure. The central team of two persons, supported by an
accountant is located at Head office of VIKAS at Ahmedabad. Each city has a
team of one or two persons, depending on the scale of operations. LVN works
with about 8,000 members (all women) through 517 SHGs covering seven cities
located along the so-called Golden corridor of Gujarat.

Name of city No. of group No. of members Loan outstanding

(Rs.)

Ahmedabad 136 2284 59,65,551

Vadodara 139 2052 49,14,533

Surat 152 3247 62,98,138

Anand 15 173 2,04,830

Kheda 9 135 55,822

Mehsana 11 270 1,10,983

Gandhinagar 7 140 18,275

Total 469 8307 1,75,68,182

Recently they have shifted to JLG model because they faced some problems in
SHG model like:

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 1. Training problems

2. No one was ready to become a leader

3. No actual circulation of transactions

4. Lack of attendance during the meetings

5. Difficulty in book- keeping

In JLG model of Vikas Development Center they form a group of 5 members,

No Leader and No Book-keeping. The members are given 5 days training before
given them a membership. This training consists:

1. About the Trust

2. About the Loan

3. House verification

4. Checking the reliability of the person

5. How money can be used effectively and other formalities of the loan.

Functions of Vikas Development Center:

The central team:

• plans & monitor the operations,

• mobilizes resource,

• scrutinize and approves loan applications,

• disburses loan and;

• Maintain accounts of each SHGs as well as the programme as a whole.

The city based team:

• Formation of SHGs,

• Establishing linkages with nationalized banks,

• Training and capacity building of groups and office bearers

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• Support in writing of accounts

• Attend meetings of SHGs as per the requirements.

SHGs:

• Savings rotation within group

• Approach LVN for loan

• Collect the approved loan amount from LVN city office

• Disburse loan to members

• Collect installments and interest from the members and deposit the same with
LVN

• Reconciliation of books of accounts of the SHGs.

Socio economic characteristics:

All their members are women. They come from various communities 30% are
engaged as home based workers and the rest who work are employed in
factories, in hospitals, or as vendors. They live in one room houses or slum
quarters.

Challenges faced:

Competition- The main challenge faced by Vikas development centre ids

competition of Nationalized Banks, Other NGO’s and Private players

As such Vikas development centre is a small NGO and can’t reach most client
which banks can do.

Emerging issues for the development of microfinance:

1. Housing amenities

2. Education of children

3. Transportation

4. Healthcare facilities

5. Limited no of jobs.

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 CHAPTER 9
Marketing of Microfinance Products:
1. Contract Farming and Credit Bundling:

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

2. Agri Service Centre – Rabo India:

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

3. Non Traditional Markets:

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

4. Apni Mandi:

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

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 CHAPTER 10
Success Factors of Micro-Finance in India:
Over the last ten years, successful experiences in providing finance to small entrepreneur and
producers demonstrate that poor people, when given access to responsive and timely
financial services at market rates, repay their loans and use the proceeds to increase their
income and assets. This is not surprising since the only realistic alternative for them is to
borrow from informal market at an interest much higher than market rates. Community
banks, NGOs and grass root savings and credit groups around the world have shown that
these microenterprise loans can be profitable for borrowers and for the lenders, making
microfinance one of the most effective poverty reducing strategies.

A. For NGOs:

1. The field of development itself expands and shifts emphasis with the pull of ideas, and
NGOs perhaps more readily adopt new ideas, especially if the resources required are small,
entry and exit are easy, tasks are (perceived to be) simple and people’s acceptance is high –
all characteristics (real or presumed) of microfinance.

2. Canvassing by various actors, including the National Bank for Agriculture and Rural
Development (NABARD), Small Industries Development Bank of India (SIDBI), Friends of
Women’s World Banking (FWWB), Rashtriya Mahila Kosh (RMK), Council for
Advancement of People’s Action and Rural Technologies (CAPART), Rashtriya Gramin
Vikas Nidhi (RGVN), various donor funded programmes especially by the International Fund
for Agricultural Development (IFAD), United Nations Development Programme (UNDP),
World Bank and Department for International Development, UK (DFID)], and lately
commercial banks, has greatly added to the idea pull. Induced by the worldwide focus on
microfinance, donor NGOs too have been funding microfinance projects. One might call it
the supply push.

3. All kinds of things from khadi spinning to Nadep compost to balwadis do not produce such
concrete results and sustained interest among beneficiaries as microfinance. Most NGO-led
microfinance is with poor women, for whom access to small loans to meet dire emergencies
is a valued outcome. Thus, quick and high ‘customer satisfaction’ is the USP that has
attracted NGOs to this trade.

4. The idea appears simple to implement. The most common route followed by NGOs is
promotion of SHGs. It is implicitly assumed that no ‘technical skill’ is involved. Besides,
external resources are not needed as SHGs begin with their own savings. Those NGOs that
have access to revolving funds from donors do not have to worry about financial performance
any way. The chickens will eventually come home to roost but in the first flush, it seems all
so easy.

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5. For many NGOs the idea of ‘organising’ – forming a samuha – has inherent
appeal. Groups connote empowerment and organising women is a double bonus.

6. Finally, to many NGOs, microfinance is a way to financial sustainability. Especially for

the medium-to-large NGOs that are able to access bulk funds for on-lending, for example
from SIDBI, the interest rate spread could be an attractive source of revenue than an
uncertain, highly competitive and increasingly difficult-to-raise donor funding.

B. For Financial Institutions and banks:

Microfinance has been attractive to the lending agencies because of demonstrated

sustainability and of low costs of operation. Institutions like SIDBI and NABARD are hard
nosed bankers and would not work with the idea if they did not see a long term engagement –
which only comes out of sustainability (that is economic attractiveness).

On the supply side, it is also true that it has all the trappings of a business enterprise, its
output is tangible and it is easily understood by the mainstream. This also seems to sound
nice to the government, which in the post liberalisation era is trying to explain the logic of
every rupee spent. That is the reason why microfinance has attracted mainstream institutions
like no other developmental project.

Perhaps the most important factor that got banks involved is what one might call the policy
push. Given that most of our banks are in the public sector, public policy does have some
influence on what they will or will not do. In this case, policy was followed by diligent, if
meandering, promotional work by NABARD. The policy change about a decade ago by RBI
to allow banks to lend to SHGs was initially followed by a seven-page memo by NABARD
to all bank chairmen, and later by sensitisation and training programmes for bank staff across
the country. Several hundred such programmes were conducted by NGOs alone, each
involving 15 to 20 bank staff, all paid for by NABARD. The policy push was sweetened by
the NABARD refinance scheme that offers much more favourable terms (100% refinance,
wider spread) than for other rural lending by banks. NABARD also did some system setting
work and banks lately have been given targets. The canvassing, training, refinance and close
follow up by NABARD has resulted in widespread bank involvement.

Moreover, for banks the operating cost of microfinance is perhaps much less than for pure
MFIs. The banks already have a vast network of branches. To the extent that an NGO has
already promoted SHGs and the SHG portfolio is performing better than the rest of the rural
(if not the entire) portfolio, microfinance via SHGs in the worst case would represent
marginal addition to cost and would often reduce marginal cost through better capacity
utilisation. In the process the bank also earns brownie points with policy makers and meets its
priority sector targets.

98
It does not take much analysis to figure out that the market for financial services for
the 50-60 million poor households of India, coupled with about the same number who are
technically above the poverty line but are severely under-served by the financial sector, and
is a very large one. Moreover, as in any emerging market, though the perceived risks are
higher, the spreads are much greater. The traditional commercial markets of corporate,
business, trade, and now even housing and consumer finance are being sought by all the
banks, leading to price competition and wafer thin spreads.

Further, bank-groups are motivated by a number of cross-selling opportunities in the market,

for deposits, insurance, remittances and eventually mutual funds. Since the larger banks are
offering all these services now through their group companies, it becomes imperative for
them to expand their distribution channels as far and deep as possible, in the hope of
capturing the entire financial services business of a household.

Finally, both agri-input and processing companies such as EID Parry, fast-moving consumer
goods (FMCG) companies such as Hindustan Levers, and consumer durable companies such
as Philips have realised the potential of this big market and are actively using SHGs as entry
points. Some amount of free-riding is taking place here by companies, for they are using
channels which were built at a significant cost to NGOs, funding agencies and/or the
government.

On the whole, the economic attractiveness of microfinance as a business is getting

established and this is a sure step towards mainstreaming. We know that mainstreaming is a
mixed blessing, and one tends to exchange scale at the cost of objectives. So it needs to be
watched carefully.

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 CHAPTER 11
Issues in Microfinance:
1. Sustainability:

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

2. Lack of Capital:

The second area of concern for MFIs, which are on the growth path, is that they face a
paucity of owned funds. This is a critical constraint in their being able to scale up. Many of
the MFIs are socially oriented institutions and do not have adequate access to financial
capital. As a result they have high debt equity ratios. Presently, there is no reliable
mechanism in the country for meeting the equity requirements of MFIs.

The IPO issue by Mexico based ‘Comparators’ was not accepted by purists as they thought it
defied the mission of an MFI. The IPO also brought forth the issue of valuation of an MFI.

The book value multiple is currently the dominant valuation methodology in microfinance
investments. In the case of start up MFIs, using a book value multiple does not do justice to
the underlying value of the business. Typically, start ups are loss making and hence the book
value continually reduces over time until they hit break even point. A book value multiplier
to value start ups would decrease the value as the organization uses up capital to build its
business, thus accentuating the negative rather than the positive.

3. Financial service delivery:

Another challenge faced by MFIs is the inability to access supply chain. This challenge can
be overcome by exploring synergies between microfinance institutions with expertise in
credit delivery and community mobilization and businesses operating with production supply
chains such as agriculture. The latter players who bring with them an understanding of
similar client segments, ability to create microenterprise opportunities and willingness to
nurture them, would be keen on directing microfinance to such opportunities. This enables
MFIs to increase their client base at no additional costs.

100
Those businesses that procure from rural India such as agriculture and dairy often
identify finance as a constraint to value creation. Such businesses may find
complementarities between an MFI’s skills in management of credit processes and their own
strengths in supply chain management.

ITC Limited, with its strong supply chain logistics, rural presence and an innovative
transaction platform, the e-choupal, has started exploring synergies with financial service
providers including MFIs through pilots with vegetable vendors and farmers. Similarly, large
FIs such as Spandana foresee a larger role for themselves in the rural economy ably
supported by value creating partnerships with players such as Mahindra and Western Union
Money Transfer.

ITC has initiated a pilot project called ‘pushcarts scheme’ along with BASIX (a microfinance
organization in Hyderabad). Under this pilot, it works with twenty women head load vendors
selling vegetables of around 10- 15 kgs per day. BASIX extends working capital loans of
Rs.10,000/- , capacity building and business development support to the women. ITC
provides support through supply chain innovations by:

1. Making the Choupal Fresh stores available to the vendors, this avoids the hassle of
bargaining and unreliability at the traditional mandis (local vegetable markets). The women
are able to replenish the stock from the stores as many times in the day as required. This has
positive implications for quality of the produce sold to the end consumer.

2. Continuously experimenting to increase efficiency, augmenting incomes and reducing

energy usage across the value chain. For instance, it has forged a partnership with National
Institute of Design (NID), a pioneer in the field of design education and research, to design
user-friendly pushcarts that can reduce the physical burden.

3. Taking lessons from the pharmaceutical and telecom sector to identify technologies that
can save energy and ensure temperature control in push carts in order to maintain quality of
the vegetables throughout the day. The model augments the incomes of the vendors from
around Rs.30-40 per day to an average of Rs.150 per day. From an environmental point of
view, push carts are much more energy efficient as opposed to fixed format retail outlets

4. HR Issues:

Recruitment and retention is the major challenge faced by MFIs as they strive to reach more
clients and expand their geographical scope. Attracting the right talent proves difficult
because candidates must have, as a prerequisite, a mindset that fits with the organization’s
mission.

Many mainstream commercial banks are now entering microfinance, who are poaching staff
from MFIs and MFIs are unable to retain them for other job opportunities.

85% of the poorest clients served by microfinance are women. However, women make up
less than half of all microfinance staff members, and fill even fewer of the senior
management roles. The challenge in most countries stems from cultural notions of women’s
101
roles, for example, while women are single there might be a greater willingness on
the part of women’s families to let them work as front line staff, but as soon as they marry
and certainly once they start having children, it becomes unacceptable. Long distances and
long hours away from the family are difficult for women to accommodate and for their
families to understand.

5. Micro insurance:

First big issue in the micro insurance sector is developing products that really respond to the
needs of clients and in a way that is commercially viable.

Secondly, there is strong need to enhance delivery channels. These delivery channels have
been relatively weak so far. Micro insurance companies offer minimal products and do not
want to go forward and offer complex products that may respond better. Micro insurance
needs a delivery channel that has easy access to the low-income market, and preferably one
that has been engaged in financial transactions so that they have controls for managing cash
and the ability to track different individuals.

Thirdly, there is a need for market education. People either have no information about micro
insurance or they have a negative attitude towards it. We have to counter that. We have to
somehow get people - without having to sit down at a table - to understand what insurance is,
and why it benefits them. That will help to demystify micro insurance so that when agents
come, people are willing to engage with them.

6. Adverse selection and moral hazard:

The joint liability mechanism has been relied upon to overcome the twin issues of adverse
selection and moral hazard. The group lending models are contingent on the availability of
skilled resources for group promotion and entail a gestation period of six months to one year.
However, there is not sufficient understanding of the drivers of default and credit risk at the
level of the individual. This has constrained the development of individual models of micro
finance. The group model was an innovation to overcome the specific issue of the quality of
the portfolio, given the inability of the poor to offer collateral. However, from the perspective
of scaling up micro financial services, it is important to proactively discover models that will
enable direct finance to individuals.

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 CHAPTER 12
RECOMMENDATION & CONCLUSION:
RECOMMENDATION:

As such if we look microfinance at corporation bank, it is just at the initial stage.

They are providing loans to FWWB and Vardan trust.

They have launched Kisan credit card so farmers so that they can easily access bank.

And some other activities like Loans to dabawalas, hawkers etc…

Following are the recommendations how they can expand their microfinance activities:

1. They should provide loans to the NGOs like Vikas Development centre. If they directly
provide loan to small NGOs then rate of interest can be low for NGOs so it will be benefial
for the NGOs as well as Bank
2. They can directly contact village people to open an a/c for free of charge and organized some
kind of lottery system so that new customers can be attracted.
3. In order for easy access to the branch, they should launch satellite branches (banking in the
van) in villages so that it can reduce the overall cost.
4. They can also go for SIM embedded with bank account toolkit for urban people. This will
reduce the transaction cost for the bank.
5. some small innovative products that can be accepted in India are
a. Insurance for prescribed medicine and laboratory tests.
b. Funeral Insurance
c. A loan to rehabilitate one’s credit record
d. “Incentivized” savings
e. Contractual savings for education.
6. It can also adopt Contract farming which is successfully done by yes bank and it’s a popular
service among farmers.
7. Loan can be delivered on Card; customer can avail cash from nearest partner - Post
office/ATM/ Cash advance terminal like POS
8. Enlisting partners like Post offices and Roaming agents who can use offline/ online
handheld devices to update loan repayments on the field
9. Deliver the loan history on a smart chip card. Information on the same can be read off
and printed off handheld readers

CONCLUSION
103
 Microcredit and microfinance have received extensive recognition as a strategy for
poverty reduction and for economic empowerment. Microfinance is a way for fighting
poverty, particularly in rural areas, where most of the world's poorest people live. Accessing
small amounts of credit at reasonable interest rates give poor people an opportunity to set up
their own small business. Many studies show that poor people are trustable, with higher
repayment rates than conventional borrowers.

When poor people have access to financial services, they can earn more, build their assets,
and cushion themselves against external shocks. Poor households use microfinance to move
from everyday survival to planning for the future: they invest in better nutrition, housing,
health, and education.

Most poor people cannot get good financial services that meet their needs because there are
not enough strong institutions that provide such services. Strong institutions need to charge
enough to cover their costs. Cost recovery is not an end in itself. Rather, it is the only way to
reach scale and impact beyond the limited levels that donors can fund. A financially
sustainable institution can continue and expand its services over the long term. Achieving
sustainability means lowering transaction costs, offering services that are more useful to the
clients, and finding new ways to provide banking services to the poor. At the end it should be
mentioned that Poor people with no income or means of repayment need other kinds of
support before they can make good use of loans. In many cases, other tools will alleviate
poverty better—for instance, small grants, employment and training programs, or
infrastructure improvements. Where possible, such services should be coupled with building
savings.

CHAPTER 13
BIBLIOGRAPHY:
104
1. A book of Understanding Microfinance by Debadutta kumar Panda

2. Website

www.mixmarket.org

www.nabard.com

www.corpbank.org

www.fwwbindia.net

www.scribd.com

www.hindibusinesstimes.com

www.vardanmfi.com

www.rbi.com

3. Annual report and other materials given by the corporation bank

105