What is microfinance?

Opportunity International Australia helps people out of poverty through microfinance. Microfinance
includes basic financial services - including small loans, savings accounts, fund transfers and insurance.
Alongside non-financial services such as business training, microfinance assists people living in poverty
who wouldn’t usually qualify for regular banking services because they have no form of collateral or
formal identification. 

Loans as small as as $100 help people in poverty start or grow their own small business. This enables
them to earn an income so they can afford food, clean water, proper shelter and an education for their
children.

Here’s how it works…

By helping a mother buy a sewing machine to start a tailoring business or a father buy seeds to plant a
vegetable garden, small loans enable people in poverty to earn an income and provide for their
families. As each business grows, loans are paid back and lent out again. With 97% of loans repaid, the
cycle continues, year after year. Each successful business feeds a family, employs more people and
eventually helps empower a whole community.

TOTAL MFI’s ACROSS INDIA

Gross loan portfolio USD, 2009 4.4 billion
Number of active borrowers 2009 26.6 million
Average loan balance per borrower USD, 2009 144.4
Deposits USD, 2009 204.9 million
Total assets USD, 2009 5.1 billion
Number of depositors 2009 2.0 million

Showing 88 MFIs reporting data for 2009.

Name Diamonds Gross loan portfolio Number of active borrowers
Adhikar 5 9,041,134 62,652
AML 4 315,439,786 1,340,288
Arohan 5 21,746,801 187,754
ASA India 4 19,814,940 156,001
Asirvad 5 12,556,611 126,483
Asomi 3 4,733,847 40,449
AWS 5 3,064,137 18,930
Bandhan 5 332,462,204 2,301,433
BASIX 5 172,484,946 1,114,468
Name Diamonds Gross loan portfolio Number of active borrowers
BFL 3 25,837,861 220,645
BISWA 4 58,971,572 305,679
BJS 5 551,901 6,040
BSS 4 32,193,592 228,514
BWDC 3 1,214,359 11,230
Cashpor MC 5 59,461,459 417,039
Chaitanya 1 237,010 1,679
CReSA 4 5,529,032 35,118
Disha 3 717,721 8,366
Equitas 5 134,597,374 888,600
ESAF 4 34,610,035 220,011
FFSL 1 54,332,892 257,991
GFSPL 5 73,420,428 352,648
GOF 5 6,025,239 67,310
Grama Vidiyal Microfinance Ltd. 5 134,568,751 772,050
Grameen Sahara 3 1,013,720 6,943

In late 2009 , CRISIL which is India’s leading ratings, research and risk advisory
company released it’s list of top 50 microfinance institutions in India. The report
titled India’s Top 50 Microfinance Institutions presents an overview of leading
players in India’s microfinance institution (MFI) space.
CRISIL List of  Top 50 Microfinance Institutions in India by Loan
Amount Outstanding for 2009
1. SKS Microfinance Ltd (SKSMPL)
2  Spandana Sphoorty Financial Ltd (SSFL)
3  Share Microfin Limited (SML)
4  Asmitha Microfin Ltd (AML)
5  Shri Kshetra Dharmasthala Rural Development Project(SKDRDP)
6  Bhartiya Samruddhi Finance Limited (BSFL)
7  Bandhan Society
8  Cashpor Micro Credit (CMC)
9  Grama Vidiyal Micro Finance Pvt Ltd (GVMFL)
10  Grameen FinancialServices Pvt Ltd (GFSPL)
11  Madura Micro Finance Ltd (MMFL)
12  BSS Microfinance Bangalore Pvt Ltd (BMPL)
13  Equitas Micro Finance India P Ltd (Equitas)
14  Bandhan Financial Services Pvt Ltd (BFSPL)
15  Sarvodaya Nano Finance Ltd (SNFL)
16  BWDA Finance Limited (BFL)
17  Ujjivan FinancialServices Pvt Ltd (UFSPL)
18  Future Financial Services ChittoorLtd (FFSL)
19  ESAF Microfinance & Investments Pvt. Ltd (EMFIL)
20  S.M.I.L.E Microfinance Limited
21  SWAWS Credit Corporation India Pvt Ltd (SCCI)
22  Sanghamithra Rural Financial Services (SRFS)
23  Saadhana Microfin
24  Gram Utthan Kendrapara,
25  Rashtriya Seva Samithi (RASS)
26  Sahara Utsarga Welfare Society (SUWS)
27  Sonata Finance Pvt Ltd (Sonata)
28  Rashtriya Gramin Vikas Nidhi
29  Arohan Financial Services Ltd (AFSL)
30  Janalakshmi Financial Services Pvt Ltd (JFSPL)
31  Annapurna Financial Services Pvt Ltd
32  Hand in Hand  (HiH)
33  Payakaraopeta Women’s Mutually Aided Co-operative Thrift and Credit
Society (PWMACTS)
34  Aadarsha Welfare Society(AWS)
35  Adhikar
36  Village Financial Services Pvt Ltd (VFSPL)
37  Sahara Uttarayan
38  RORES Micro Entrepreneur Development Trust(RMEDT)
39  Centre for Rural Social Action (CReSA)
40  Indur Intideepam Federation Ltd (IIMF)
41  Welfare Organisation for Multipurpose Mass Awareness Network
(WOMAN)
42  Pragathi Mutually Aided Cooperative Credit and Marketing Federation
Ltd(PMACS)
43  Indian Association for Savings and Credit(IASC)
44  Sewa Mutually Aided Cooperative Thrift Societies Federation Ltd (Sewa)
45  Initiatives for Development Bangalore, Foundation (IDF)
46  Gandhi Smaraka Grama Seva Kendram (GSGSK)
47  Swayamshree Micro Credit Services (SMCS)
48  ASOMI
49  Janodaya Trust
50  Community Development Centre (CDC)

CURREBT ISSUE
Microfinance India Summit 2010
Over the last seven years, the Microfinance India Summit, organized by ACCESS Development Services,
has established itself as an international conference dedicated to Indian microfinance. It has become the
single most important platform for sharing the Indian experience, unique as it is, with a global audience.
At the same time, it also provides an avenue to learn about international trends and best practices for
adaptation by the Indian community of practitioners. Policy makers, practitioners, promoters, academics,
researchers and thought leaders share their experiences on various panels, and about 1000 delegates
from both within and outside the country participate in the Summit. It bridges the unnecessary hiatus
between models and methodologies and helps to build consensus on the critical challenges and issues.
In the past, the Summit themes have helped in focusing on key issues including "Inclusion, Innovation
and Impact" (2005), "Urban Microfinance" (2006), "Formal Financial Institutions - the challenges of
depth and breadth" (2007), "The Poor First" (2008) and "Doing good and doing well- The need for
balance" (2009)
The microfinance India Summit 2010 was held between November 15-16, 2010 at Hotel Ashok, New
Delhi. The over-arching theme for the Summit was "Mission of Microfinance - Need to Reflect and
Reaffirm". Resonating the current situation in the Indian microfinance sector, the Summit sessions
focused on current trends and issues relating to sustainability, transparency, social performance,
commercialization of the sector, client protection, among others. The highlights of the Summit are
encapsulated in the daily newsletters released during the Summit. The full report on the Summit 2010
will be uploaded shortly.
Day 3 (November 17, 2010) was organized as sponsored Thematic Round Tables held at the India
Habitat Center, New Delhi.
The Round Tables have been designed to enable interested organizations / institutions to allow for more
insightful discussions on a current issue / theme, present finding of recent research, share innovative
ideas or hold consultative workshops in a structured manner with a selected small audience.

HOW IT UNRAVELLED

First, MFIs were in a hurry to grow fast. SKS Microfinance, a listed company, has grown 90 per cent annually for the
last four years (see Table), from just two lakh members to 40 lakh members in less than three years.

The loan disbursements have gone up from just Rs 150 crore to over Rs 4,400 crore in three years. Growth prompted
investment grades from rating agencies. Whenever loans are disbursed in haste, one can anticipate problems later.

Second, the concept of self help group (SHG) was not followed. The concept involves forming groups of 15-20
women, who meet regularly, understand each other's problems and bond for a while. They are expected to save a
small amount, keep the money in bank and earn interest.

A member could borrow when she falls ill and can't go for work. She would return the money with 18-24 per cent
interest to the group. The recovery is almost certain, due to peer pressure and bonding with the group.
Such group formation and bonding takes a minimum of six to nine months. The MFI did not have so much time and
wanted to grow rapidly in tune with their private equity investors. They went in for the Joint Liability Group (JLG)
method. Their agents would persuade five women to form a group and each guaranteed the others' loans. Most
members of JLG could not develop the special bonding they would have in SHG.

Third, the MFI apparently charged lower interests of 12-18 per cent in JLG, compared with that of 18-24 per cent
charged by SHGs primarily run by the PSU banks. MFI interest rates were non-transparent and effective rates often
were over 27 per cent, considering loan processing fees, penalties and hidden charges.

THE SUBPRIME BUBBLE

How did the borrowers repay? Many adopted what is now known as ‘ever greening' tactics. They would borrow on
Mondays from one MFI and repay to the other MFI on Wednesdays. Since all of them were growing with plenty of
funds from the private sector banks, the party went on.

Of late the PSU banks too joined the party. For instance a major PSU bank that had Rs 1,000 crore exposure to SHG
based loans, lent another Rs 60 crore to MFIs.

Should we credit the Government of Andhra Pradesh for bursting the MFI bubble? Has the lending reached many
subprime borrowers? Prima-facie the evidence seems in favour of the government.

Each poor family seems to have borrowed over Rs 30,000 per year. While every MFI claims that it has lent just Rs
10,000 per family, multiple lending suggests a higher figure.

Most MFIs claim they have lent for income-generating activities. In reality, most lending has been for consumption
purposes – buying a TV, repairing a house, paying for school-college fees or for serious illness of a family member.

Thus, indiscriminate lending and irresponsible borrowing was encouraged, leading to the subprime bubble.

THE WAY OUT

First, the sector has to be regulated by the state governments. They can, however, go overboard and stifle the sector.
Politicians would be too happy to ask people not to repay their loans to banks. The Andhra ordinance expects MFIs to
obtain approval to make tiny loans, which is impractical. Hence, regulation has to be tempered by a sensible
institution like RBI.

Second, the regulation should encourage bonding their members, with savings, self-help, education, and not just
credit. Money has to be lent only when the economic viability of projects is well established. The capacity of a village
or a cluster to support income-generating activities has to be worked out to cap MFI lending geographically.

Third, the MFIs who give credit to crores of women groups don't employ women to the same extent. Most show just
3-4 per cent women employees. This percentage must go up drastically. A holistic scheme to help the poor has to
include – health insurance, self-help, education, employment and finally credit. Many MFIs overturned this philosophy
by concentrating just on credit.

---------------------------------------------------------------------------------------------------------------

Subprime lending refers to loans extended to people with poor repaying ability that ultimately led to
defaults.

The Rs 25,000-crore microfinance industry is facing tumultuous times ever since the biggest, SKS
Microfinance, created a controversy two months ago by sacking chief executive Suresh Gurumani.
There was a confluence of woes for the sector when the Andhra Pradesh government came up with
legislation curbing their operations. Banks pulled back on lending as some of the institutions were
behaving more like moneylenders and in some cases drove borrowers to suicide.
Indian banks such as SBI, ICICI Bank and Axis Bank are estimated to have lent Rs 16,000 crore to micro
lenders. ICICI's lending is at Rs 2,000 crore, SBI's at more than Rs 1,000 crore and Sidbi's at Rs 4,000
crore, according to data from rating company Care.
The financial magnitude may not be the same with the Indian microfinance industry being tiny compared
with the subprime lending crisis that led to more than a trillion dollars of losses and sank many venerable
institutions.

But there are similarities such as opaque practices, high salaries and commissions inducing unethical
business, and leverage.

The current practices may create systemic problems too, unlike moneylenders who operate with their own
money.

"If it is profit and if there is lending, aggressively, then it's just moneylending," said Mr Reddy, who was
criticised before the credit crisis for his conservative approach to policymaking.

"Also, if you look at it, the resource is leveraged, it's not just moneylending business. The moneylender
normally lends out his own money, whereas here the MFI is actually borrowing money from depositors
and lending the money. So essentially, he is a moneylender, but a leveraged moneylender."

India's Microfinance Collapse And Educated Second Rising

India, considered the epicenter of the developing world Microfinance Institutions (MFIs), is facing a severe
crisis. The sources and events leading up to the collapse are unclear. In response, the leaders of
microfinance solutions and their employees have found an increased motivation to be sure that every last
loan and effort is spent well. These individuals, often attracted to MFIs with the promise of steady work,
have found new significance from the phrase "meaningful work". As they are able to see their
communities start to flourish and entrepreneurs start healthy local economies, they are determined to
continue the stability and success MFIs have brought to their regions.
With not only the dedication to keep MFI project-funding from drying up, but also the financial resources
and experience to ensure success, Grameen Foundation and Grameen Foundation India have teamed up
to address the collapse. Their first objective is to work directly with MFIs on their internal organizational
structure, training, and leadership. By equipping the MFI staff with additional tools to fulfill their
organization's mission, the Grameen Foundations will help stabilize the heart of the microfinance sector in
India. By investing directly in the distribution channels, their efforts can be leveraged from the internal
staff outward toward the entrepreneurs receiving funding.

The collapse has been brewing since November, when questions concerning the unusually high profits
from microfinance projects in India were analyzed. From unethical business sharks to market in place of
mission minded accusations, many of the issues went unresolved. Regulators are now taking on a more
serious role to address predatory lending and favoritism within the microfinance sector. The unethical
practices have been compared to the predatory financial institution practices in the United States that
have been credited with the economic downturn in the US, and consequentially globally. The majority of
predatory microfinance practices came out of large banks and lending institutions, while the smaller MFIs
appeared to be more resilient.

These unfavorable reports of MFIs have cast a great deal of doubt on the future of microfinance in India.
Yet the dedication of field workers and non-profit organizations to restore the mission-minded purpose to
small-scale MFIs are fighting back. It would be disappointing to say the least to see small-scale loans with
big impacts be revoked due to higher-level negligence and predatory practices. Time will tell whether
the social enterprises that sprouted from microfinance loans will survive once the banks have truly fallen.
 SKS Microfinance sells Rs 6.1 bn securitised loans
Reuters, Mar 29, 2011, 01.57pm IST

Tags:
 SKS Microfinance Ltd.|
 SKS Microfinance
MUMBAI: SKS Microfinance, India's largest and only publicly listed microfinance institution, said on
Tuesday it sold securitised loans worth 5.5 billion rupees in two tranches to banks.
The company also said it sold securitised loans worth 600 million rupees to a non-banking financial
company earlier this month.

"The transactions will further augment the liquidity position of SKS Microfinance, " said Chief Financial
Officer S Dilli Raj said, adding such loan markets "had virtually ceased post the AP (Andhra Pradesh) MFI
Act."

Challenges ahead
•Appropriate legal structures for the structured growth of MF operations
•Finding adequate levels of equity for the new entities to leverage loan funds
•Ability to access loan funds at reasonably low rates of interest.
•Ability to attract and retain professional and committed human resources.
•Design of apt MIS including user friendly software for tracking accounts and operations.
•Appropriate loan products for different segments.
•Bring out a compendium of small and micro enterprises for the MF clients.
•Identify and prepare a panel of locally available trainers.
•Ability to train trainers.
•Capacity to provide backward linkages or create support structures for marketing.
Related Issues
•Designing financially sustainable models
•Aim for community participation & ownership
•Increase outreach and scale up operations
•Demonstrate that banking with the poor is viable
•Build professional systems and processes.
•Ensure transparency and enhance credibility through disclosures.
•Provide support for capacity building initiatives