MICROFINANCE A SMALL IDEA WITH BIG IMPACT

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INTRODUCTION

Microfinance serves as an umbrella term that describes the provision of banking services by poverty-
focused financial institutions (microfinance institutions – MFIs) to poor parts of the population that are
not being served by mainstream financial services providers. According to the World Bank, around 1.1
bn people live in extreme poverty of less than USD 1 a day and around 2.7 billion people – equivalent
to roughly 40% of the world’s population – live on less
than USD 2 per day.

POVERTY LEVELS IN DIFFERENT COUNTRIES

Extreme poverty shares in developing countries vary widely with regional figures ranging from 9% in
East Asia and the Pacific to 41% in Sub-Saharan Africa. The core service of microfinance is the
provision of microcredit.
Typically, these are small loans to the working poor. These loans usually amount to a local currency
equivalent which starts at just below USD 100 and can, over time, reach several times this amount
depending on the geographic region. For instance, in Asia the average loan amounts to around USD
150, while in Eastern Europe and Central Asia loans amount to approximately USD 1600 on average.4
In addition, many MFIs are increasingly starting to offer micro-deposits and micro-insurance services
to their clients. In terms of institutional and ownership structures, the MFI universe is composed of a

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large variety of different forms which comprises NGOs, cooperatives, specialised financial institutions
and niche banks that in some cases are even regulated financial institutions.

Understanding Microfinance

Robinson (2001) defines microfinance as “small-scale financial services—primarily credit and savings
—provided to people who farm, fish or herd” and adds that it “refers to all types of financial services
provided to low-income households and enterprises.” In India, microfinance is generally understood but
not clearly defined. For instance, if an SHG gives a loan for an economic activity, it is seen as
microfinance. But if a commercial bank gives a similar loan, it is unlikely that it would be treated as
microfinance. In the Indian context there are some value attributes of microfinance:
• Microfinance is an activity undertaken by the alternate sector (NGOs). Therefore, a loan given
by a market intermediary to a small borrower is not seen as microfinance. However when an NGO gives
a similar loan it is treated as microfinance. It is assumed that microfinance is given with a laudable
intention and has institutional and non exploitative connotations. Therefore, we define microfinance not
by form but by the intent of the lender.

• Second, microfinance is something done predominantly with the poor. Banks usually do not
qualify to be MFOs because they do not predominantly cater to the poor. However, there is ambivalence
about the regional rural banks (RRBs) and the new local area banks (LABs).

• Third, microfinance grows out of developmental roots. This can be termed the “alternative
commercial sector.” MFOs classified under this head are promoted by the alternative sector and target
the poor. However these MFOs need not necessarily be developmental in incorporation.

DEFINITION
Microfinance is the provision of a broad range of financial services such as deposits, loans, payment
services, money transfers, and insurance to poor and low-income households and, their
microenterprises. Microfinance services are provided by three types of sources:

• Formal institutions, such as rural banks and cooperatives;

• Semiformal institutions, such as nongovernment organizations; and

• Informal sources such as money lenders and shopkeepers.

Institutional microfinance is defined to include microfinance services provided by both formal and
semiformal institutions. Microfinance institutions are defined as institutions whose major business is
the provision of microfinance services.

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NEED OF MICROFINANCE
The systems and procedures of banking institutions was emphasizing on complicated qualifying
requirements, tangible collateral, margin, etc., that resulted in a large section of the rural poor shying
away from the formal banking sector. The banks too experienced that the rapid expansion of branch
network was not contributing to an increasing volume of business to meet high transaction costs and risk
provisioning, which even threatened the viability of banking institutions and sustainability of their
operations.

At the same time, it was not possible for them to allow a population of close to 300 million - even if
poor - to remain outside the fold of its business. The search for an alternative mechanism for catering to
the financial service needs of the poor was thus becoming imperative.

Microfinance in the Asian and Pacific Region

Over 900 million people in about 180 million households in the Region live in poverty. Most of the
Region’s poor (i.e., those who earn less than $1.00 a day) or more than 670 million people, live in rural
areas (footnote 1), although urban poverty is also a growing problem in virtually all DMCs. Most rural
poor people are engaged in agricultural or related activities as laborers or small scale farmers. Many are
also involved in a variety of microenterprises. In many countries, women, who are a significant
proportion of the poor and suffer disproportionately from poverty, operate many of these
microenterprises.

Most formal financial institutions do not serve the poor because of perceived high risks , high costs
involved in small transactions ,perceived low relative profitability, and inability of the poor to provide
the physical collateral usually required by such institutions. The business culture of these institutions
is also not geared to serve poor and low-income households. Lacking access to institutional sources of
finance, most poor and low-income households continue to rely on meager self-finance or informal
sources of microfinance. However, these sources limit their ability to actively participate in and benefit
from the development process (Appendix 2). Thus, a segment of the poor population that has viable
investment opportunities persists in poverty for lack of access to credit at reasonable costs. The poor
also lack access to institutional credit for consumption smoothening and to other services such as
payments, money transfers, and insurance.10 Most of the poor households also find it difficult to
accumulate financial savings without easy access to safe institutions that provide deposit services.

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MICROFINANCE IN INDIA

Microfinance in India started in the early 1980s with small efforts at forming informal self-help groups
(SHG) to provide access to much-needed savings and credit services. From this small beginning, the
microfinance sector has grown significantly in the past decades. National bodies like the Small
Industries Development Bank of India (SIDBI) and the National Bank for Agriculture and Rural
Development (NABARD) are devoting significant time and financial resources to microfinance. This
points to the growing importance of the sector. The strength of the microfinance organizations (MFOs)
in India is in the diversity of approaches and forms that have evolved over time. In addition to the home-
grown models of SHGs and mutually aided cooperative societies (MACS), the country has learned from
other microfinance experiments across the world, particularly those in Bangladesh, Indonesia, Thailand,
and Bolivia, in terms of delivery of microfinancial services.

Microfinance is an 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. History of Microfinance in India In India, institutional credit agencies (banks)
made an entry in rural areas initially to provide an alternative to the rural money lenders who provided
credit support, but not without exploiting the rural poor. There are 3 main factors that count to the
bringing up of Microfinance as a Policy in India

1. The first of these pivotal events was Indira Gandhi’s bank nationalization drive launched in 1969
which required commercial banks to open rural branches resulting in a 15.2% increase in rural bank
branches in India between 1973 and 1985. Today, India has over 32,000 rural branches of commercial
banks and regional rural banks, 14,000 cooperative bank branches.

2. The second national policy that has had a significant impact on the evolution of India’s banking and
financial system is the Integrated Rural Development Program (IRDP) introduced in 1978 and designed
to be ‘a direct instrument for attacking India’s rural poverty.’ This program is interesting to this study
because it was a large program whose main thrust was to alleviate poverty through the provision of
loans and it was considered a failure.

3. The last major event which impacted the financial and banking system in India was the liberalization
of India’s financial system in the 1990s characterized by a series of structural adjustments and financial
policy reforms initiated by the Reserve.

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Micro-lending at a glance

Microfinance is based on recognising that the working poor can act in an entrepreneurial manner and
are, in principle, creditworthy. For these micro-borrowers, microcredit is often the only alternative to
paying excessive interest rates charged by unofficial moneylenders or pawnshops in developing
countries. For instance, in the Philippines loan sharks often charge an annualised interest rate of up to
1000% for a monthly loan.5 In contrast, interest rates charged by MFIs are in the range of 15% to 70%
p.a. Seen from the perspective of a developed country this may still seem high but these rates result from
the small size of loans and the high administrative costs as loan officers need to travel to remote places
and intensively advise clients. It is estimated that administrative costs amount of up to two thirds of
interests paid by clients. In addition, there is a need for risk provisioning. Women make up the vast
majority of borrowers, especially in Asia. Shares of female debtors are as high as 99%.6 the
predominance of women reflects the fact that women are more reliable debtors because, due to stronger
social and family ties, they often follow a more conservative investment strategy which in turn results in
lower default rates for MFIs. This lower credit risk is further supported by a relatively low degree of
labour mobility of female clients (due to strong family ties women tend to work from home) which
decreases the cost of monitoring debtors for an MFI. In contrast to commercial banks, micro-lending
institutions usually refrain from taking collateral. Instead, in order to influence borrower behavior, many
MFIs apply the principle of group lending. This entails that an MFI lends a small loan to an individual,
who belongs to a group of 5 to 20 people. As soon as the individual borrower proves reliable, credit is
extended to additional people within the group. This procedure creates an incentive for the group to
monitor each other’s behaviour and to ensure borrower discipline, as the group is jointly liable for the
failure of any single member to repay her microloan. The average loan size starts from USD 100 and can
reach several hundred dollars, depending on the debtor’s repayment history. Interest rates vary
significantly according to the geographic regions, e.g. in India microloans are usually granted at 15% to
30%. Through weekly meetings between the group members and the MFI, the creditor monitors the
repayment status of each debtor publicly, which increases the transparency within the group. This
generates a form of peer pressure and is expected to foster internal monitoring among the members of
the group.7 In addition, debt screening costs in general are minimised by meeting debtors in groups.
However, not all MFIs apply the group lending principle; instead, some MFIs prefer to lend to
individuals without any shared liability aspect. This reflects, inter alia, the argument that group lending
has some shortcomings, e.g. that it only fully works in rural settings where social control is higher. In
addition, opponents of group lending argue individual lending is superior as it judges people on their
own merits rather than on the group’s. In some countries, individual lending exhibits higher average
loan amounts and often primarily serves the self-employed rather than the very poor seeking to start a
business.8 To sum up, both approaches have their advantages and respond to different circumstances;
hence, it can be expected that individual and group lending techniques will continue to coexist over the
long term.

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MFIs at a glance
Globally, it is estimated that a total of over 10,000 MFIs exists that is made up of a large array of types
of MFIs such as credit unions, NGOs, cooperatives, government agencies, private and commercial banks
and various permutations of these forms. As MFIs were initially founded as non-profit enterprises that
focused on assisting the poor through access to credit their activities were initially mainly funded
through donations, subsidies and grants provided by development agencies and private donors. Over
time, some MFIs gradually started to become more formal financial institutions or even regulated
(niche) banks. This trend notably reflects the idea that becoming a more formal financial institution
helps to reach financial sustainability as it facilitates access to commercial borrowing and deposit-
taking. For instance, in many countries only regulated MFIs are allowed to take deposits. The great
variety of MFIs can be classified into four categories according to the respective degree of
commercialisation. While the two top segments include the most developed MFIs the bulk of MFIs
belong to the third and fourth categories that comprise approximately 90% of the total microfinance
sector. However, in terms of outreach tier 1 MFIs serve the vast majority of borrowers and also hold
most assets. The top tier MFIs that already have transformed themselves into more formal structures are
increasingly attracting the interest of commercial banks and institutional and individual investors. As top
tier MFIs are usually profitable and have a more experienced management, private-sector investors
consider them the most suited to absorb commercial funding and to effectively channel it to micro-
borrowers. In 2006, there were already about 30 MFIs with a loan portofolio in excess of USD 100 m.9
While most of the top 150 MFIs are regulated financial institutions, tier 2 institutions are made up of
smaller, younger MFIs. These are predominantly NGOs that are in the process of converting themselves
into regulated MFIs. Some tier 2 MFIs also receive funding from foreign investors but to a lesser extent
than tier 1 MFIs. Experts estimate that in total 300 to 400 MFIs are ready to absorb microfinance
investments. Consolidation in the microfinance sector is expected to increasingly take place both
between tier 1 and tier 2 MFIs and within these groups of MFIs. Tier 3 MFIs are in the process of
approaching profitability while suffering from a lack of funding. Tier 4 institutions are made up of start-
up MFIs or institutions where microfinance is not the primary focus. Over the medium term, we expect
the current divide between larger, increasingly commercially oriented MFIs and smaller NGO-type
MFIs to become even more evident.

Loan volume, funding sources and funding structures of MFIs

The volume of total microfinance loans has risen sharply in recent years from an estimated USD 4 bn in
2001 to around USD 25 bn in 2006. One important driver of this trend is the increasing access of leading
MFIs to commercial funding sources that comprise debt finance and national retail deposits. Depending
on the geographic region tier 1 MFIs finance lending operations to a larger (e.g. in Asia) or to a lesser
extent (other regions except for Middle East & North Africa) with national deposits or foreign and
national debt finance. This trend is also reflected in foreign investments in microfinance that has more
than doubled from USD 1.7 bn in 2004 to around USD 4.4 bn in 2006. Traditionally the funding
structure of an MFI has followed a certain pattern over its life cycle. While start-up MFIs are
characterised by a larger dependency on donations usually made in the form of equity grants, donations
and technical assistance, the more advanced MFIs tend to display a higher debt leverage through
domestic or foreign borrowing; over time some even evolve into more formalized financial institutions
(e.g. non-bank financial institutions) or even regulated MFIs such as niche banks. Especially the most

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advanced tier 1 MFIs use domestic deposits (if their legal status permits their doing so) and debt
financing as their core funding source. Apart from deposits, debt financing usually comprises both
subsidised and commercial borrowing from a large variety of domestic and foreign sources that range
from (international) development agencies and social investors to quasi-commercial and commercial
lenders. Some tier 1 MFIs even access capital markets by issuing bonds, going public or securitizing
their loan portfolios. However, an increasing number of institutions do not follow this traditional pattern
any longer. For instance, some start-up MFIs are even set up as regulated microfinance providers. Others
decide to operate as specialised lenders and not to develop into a regulated MFI. There is of course no
single optimal capital structure for an MFI; rather, decisions on funding structures for the individual
optimal funding mix is in practice based on a variety of determinants. On the one hand, internal factors
such as growth of loan portfolio and savings mobilisation and external factors such as the regulatory
framework, the availability of donors and commercial lenders and, lastly, the development and openness
of the domestic financial system are very important factors. On the other hand, the costs and maturity of
individual funding sources play a key role in determining the optimal funding mix. For MFIs, issuing
equity is the most costly source of finance (except of grant equity and other donations) followed by
unsecured and subordinated debt, while retail deposits are reported to be the cheapest funding source.
For foreign funding, potential currency risks must also be considered. However, decisions on capital
structure also need to consider the maturity of each instrument. While equity capital primarily serves as
a long-term funding source, debt has rather a medium-term maturity while deposits have usually a short-
term maturity. In the very long run and from a normative point of view, it would be desirable to enable
MFIs to primarily refinance themselves from domestic funding sources, either through national deposit-
taking or accessing local capital markets by issuing bonds or equity. After all, microfinance is a response
to the underdevelopment of the financial sector in a developing country. The ultimate objective of
developing financial markets in emerging markets and developing countries is to mobilise domestic
financial resources and to enable domestic investors to efficiently draw on domestic savings. Ultimately,
in the course of such a development, the role of foreign private sector investors in MFI financing would
gradually change from providing direct loans to MFIs via structured debt instruments or funds toward
increasingly investing into a MFI’s domestic bonds or shares

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ACCESS TO MICROFINANCE
Thus, the absolute number of poor people that have access to MFIs may be
increased. Moreover, increased competition, technological change, and financial
market policies, which focus on strengthening market forces and improving the
stability of MFIs, may positively contribute to the efficiency of MFIs. This, in turn,
may help generating more financial resources with which the poor can be helped.
Under these circumstances, outreach and financial sustainability and efficiency
seem to be compatible objectives. Yet, focussing on financial sustainability and
efficiency may also go at the cost of lending to the poor. As lending money to the
poor – especially the very poor and/or the rural poor – can be very costly, the
outreach and sustainability goal may be conflicting. Especially in policy circles
there is a hefty debate on the compatibility versus the trade-off between
sustainability and outreach. Whereas the so-called welfarist view stresses the
importance of outreach and the threat of focusing too much on sustainability, the
institutionalist view claims that MFIs should focus on sustainability. While from a
policy perspective it is very important to know whether the strife for financial
sustainability and efficiency is compatible or conflicting with the outreach goal,
there are surprisingly few studies that have investigated this issue in a systematic
and appropriate way. Most studies only provide anecdotal evidence. This study
aims at contributing to closing this gap in the literature. In particular, we provide
an in depth analysis of the potential compatibility or trade-off between effciency
of MFIs and their outreach. We use stochastic frontier analysis (SFA), a technique
that has not been used extensively in the field of microfinance, to measure the
efficiency of individual MFIs. We then link the efficiency measures obtained from
the SFA to measures of outreach. For the analysis we use data for 435 MFIs, which
we obtained from Mix Market over the period 1997-2007. The remainder of the
paper is organized as follows. Section 2 discusses the literature on the relationship
between financial sustainability, efficiency and outreach of MFIs.

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 Microfinance Home to about 1.1 billion people in India as in 2007.

India constitutes approximately one sixth of the world’s total population. It is the world’s largest
democracy and a key emerging market alongside China and Brazil. The picture of growing GDP and
rising foreign investments shows an environment where wealth is increasing for the nation. Due to its
large size and population of around 1000 million, India's GDP ranks among the top 15 economies of the
world. However, around 300 million people or about 60 million households, are living below the
poverty line. It is further estimated that of these households, only about 20 percent have access to credit
from the formal sector. Additionally, the segment of the rural population above the poverty line but not
rich enough to be of interest to the formal financial institutions also does not have good access to the
formal financial intermediary services, including savings services. A group of micro-finance
practitioners estimated the annualised credit usage of all poor families (rural and urban) at over Rs
45,000 crores, of which some 80 percent is met by informal sources. This figure has been extrapolated
using the numbers of rural and urban poor households and their average annual credit usage (Rs 6000
and Rs 9000 pa respectively) assessed through various micro studies.

Characteristics
1.Client outreach & services- The microfinance outreach of sample MFIs amounts to some 5.6 million
clients (M-CRIL, September 2006) to 6.6 million clients (for the MIX dataset, March 2007). Around three
quarters of these are based in South India and another 20% in the East. Most of the remainder are in North
India. There are relatively few MFIs in the West. Grameen MFIs with over 130,000 clients each are the largest

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in the country and together serve over 50% of the total number of clients covered. Though extensive
government support for SHG programmes has resulted in the establishment of a large number of MFIs using the
SHG methodology, these are around half the size of Grameen MFIs and, as a result, provide outreach to only
about one-third of the total number of clients covered. From the perspective of the legal framework, the
proposed new microfinance law does not cover nearly 80% of these clients since 73% a served by NBFCs (or
MFIs on the verge of transformation to NBFCs) and another 6% by Section 25 (not-for-proft) companies. Such
institutions fall outside the ambit of the proposed law.

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Indian MFIs have minuscule outstanding Rs3, 400 ($82) compared to the international average Rs19, 200 ($468)
and has not grown over the past couple of years. The Grameen clients have the smallest loan balances Rs2,700
($65). This has happened despite a high growth rate of MFI portfolios (40%) because client outreach has
expanded even faster (84%). Large numbers of new MFI clients inevitably means small loan sizes. At an average
loan balance that is just 9.9% of GNI per capita, depth of outreach is apparently substantial. However, field
experience shows that significant numbers of not-so-poor women join microfinance groups - often for social
reasons - so the loan balance-GNI ratio is not a good indicator of poverty outreach (at least for India). A highly
restrictive legal framework for deposit taking has severely constrained the offering of thrift services so client
savings form just 8.1% of outstanding loan balances. As Fig. indicates, all the methodologies have low average
savings per member except for the individual banking model. Each of the bars reflects the nature of the
methodologies and the legal framework in which the organizations operate.

2. Operating efficiency & portfolio quality-Staff productivity in India is now higher than in any other
major region offering microfinance. Some 326 staff members per MFI serve over 230 borrowers each while the
leading MFIs average 275 borrowers per member of staff. This results in some of the lowest servicing costs for
MFIs anywhere in the world. Both Grameen and SHG MFIs record average servicing costs of the order of Rs400
($10) per borrower, lower than the MIX median even for Bangladesh. As MFIs have grown and staff
productivity has increased over the years, servicing costs have come down even in nominal terms. With an
inflation rate averaging 5% per annum in the mid- 2000s, this has resulted in a decline of around 9% per annum
in the cost of servicing borrowers. Indian MFIs are now amongst the most efficient internationally. The effective
interest rate paid by the average Indian microfinance borrower is no more than 25% - not significantly different
from the ~24% usually charged even by commercial banks on consumer finance. By and large, new institutions
have low yields and high OERs but, as expansion takes place, and economies of scale set in, yields improve and
OERs decline to acceptable levels. There are significant economies of scale up to a portfolio size of Rs2.5 crores
($600,000)

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3. Financial performance- The financial viability of microfinance institutions in India is under threat, despite
improvements in the yield gap. The 2.1% weighted return on assets of the 2005 sample has been reduced to zero
while typical MFI returns are -9.8%, well behind Bangladeshi institutions reporting to the MIX, which lead the
region in profitability. Low portfolio yields, combined with poor portfolio quality and rising financial costs have
reduced Indian MFI surpluses though improvements in collection measures have boosted portfolio yields to 93%
of the expected figure, up from 85% in 2005 (Table 4.6). Yields, however, remain low, with 43% of Indian MFIs
earning less than 24% on their portfolios. In comparison with 36-50% real costs of bank loans and moneylender
interest rates ranging from 36% to 120%, MFI average yields represent a substantial benefit for low income
clients.

4. Products- Several MFIs have conducted careful market research and are in the process of developing
products based on it. Ujjivan's research into the market for housing loans revealed the life-time progression of
the typical customer from renting to "leasing" (in which the tenant pays in lieu of rent a relatively large interest-
free lump sum to the owner), to buying a house site, to building a house, to extending and repairing it. For good
customers who have established a track-record Ujjivan has started offering loans of up to Rs 30,000 for any of
these purposes using a loan from HDFC which should suffice for 1700 customers. (Box 5.5). It is looking also at
educational loans required specially at the beginning of the school year, and loans for higher education. These
products are in addition to Ujjivan's standard family-needs (or personal) loans, business loans, top-up loans,
emergency loans and festival loans. SWAWS and VWS also have educational loans. SEWA's products have
evolved over 30 years to result in the diversity.

5. Processes- As regards processes, one response to urban mobility and heterogeneity has been to do away with
center meetings altogether, and experiment with smaller sized JLGs, more suited to accommodating the diversity
of occupations, loan sizes requirements and time availabilities. As Veena Mankar points out, a maid and a
hawker are unlikely to be free at the same time to attend a group meeting (assuming they have any free time at
all). Both Ujjivan and Swadhaar have introduced monthly instead of weekly repayments, given the particularly
acute time pressures experienced by borrowers in metros (many of who have long commutes). Swadhaar even
gives them the option to pay a little extra to have their repayments collected at the doorstep. Also, doing away
with center meeting makes a virtue out of necessity, since sufficient space for a gathering (let alone for a branch
office) is prohibitively expensive, if available at all, in many urban localities.

6. Individual loans- The next logical step of course is to do away with JLGs altogether and introduce
individual loans, which are already the norm in Latin America. The advantage of individual loans is that they can
be more easily tailored to the loan size, gestation period and other cash flow requirements of the specific activity
chosen by each borrower. Individual loans are usually made to borrowers who have established a track record
through group borrowing and who require larger loans. Their higher risk is usually addressed by security in some
form and higher interest on account of the risk premium. Many MFIs have in fact already been making
individual loans for housing purposes to senior group members, although, since funds for these usually come
from the housing financing institutions, their interest rates are lower and tenor longer. What are more recent, are
loans made to small entrepreneurs and traders referred to by names such microenterprise loans, etc.33 For most
MFIs individual loans are still a small part of their portfolio, except for SEWA Bank, the MFI with the longest
experience in India (and perhaps anywhere) of individual loans.

7. SHGs or JLGs- As a delivery vehicle SHGs (instead of JLGs) would also be affected by the mobility and
time scarcity related constraints of urban life, perhaps even more so, since SHGs have more members than JLGs,
which should make it even harder to find a time for meetings suitable for all members, and increase the
likelihood of at least one member moving out of the locality. On the other hand, in theory at least, SHGs are
better suited to handle urban heterogeneity since they are expressly designed to accommodate different loan

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amounts, and like chit funds can accommodate non-borrowing or net saver members who prefer to sit back and
earn interest on loans taken by others. Moreover, given adequate accounting skills they should be able to
accommodate heterogeneity in respect of variation in desired savings, both between members and over time.
Despite this, their use is very much the exception, although Indian Bank's Microstate branch, SPMS and Roshan
Vikas rely on them exclusively, the last two as SHG federations.

8. Human resources- While the MFI human resources challenge - not just training, but attracting and retaining
staff - has been engaging the attention of the MFI community generally in the last few years, its severity in the
urban areas has taken the new urban MFIs by surprise. Nearly all of them are finding it difficult to recruit and
retain staff in conditions of a tightening job market, especially in cities like Bangalore where Ujjivan reports
attrition rates of 20 to 30 percent a year. The skills field workers acquire are turning out to be in high demand in
other parts of the financial sector, and in marketing. Also, as Veena Mankar points out, many young entrants to
the labour force find the multi-tasking nature of MFI field work too demanding, and prefer a more uni-
dimensional job (and one offering, preferably, a little more "glamour" or office comfort). Finally, the relatively
flat nature of the MFI pyramid doesn't help when it comes to promotion prospects. Clearly better pay and
incentives will have to be part of the solution, but will raise costs. Another solution being tried out is recruiting
staff in the rural areas and providing them with accommodation.

Role of Microfinance Services

1. Do not restrict loan us- Access to financial services provides the poor with the opportunity to
accumulate assets, to reduce their vulnerability to shocks (such as illness or death in the household, crop
failure, theft, dramatic price fluctuations, the payment of dowries) and to invest in income-generation
activities. It also enables them to improve the quality of their lives through better education, health and
housing. One of the most important roles of access to credit is that it enables the poor to diversify their
incomes. Most poor households do not have one source of income or livelihood. Instead they pursue a
mix of activities, depending on the season, prices, their health and other contingencies. This may include
growing their own food, working for others, running small production or trading businesses, hunting and
gathering, and accessing loans.

2. Provide access to financial services, not subsidies. For microenterprises, the most common constraint
is the lack of access to working capital to grow their business. Low-income entrepreneurs want rapid
and continued access to financial services rather than subsidies, and they are able – and willing – to pay
for these services from their profits. Most micro entrepreneurs borrow small amounts for short-term
working capital needs. The returns from their economic activities are normally sufficient to pay high
interest rates for loans and still make a profit. Micro entrepreneurs value the opportunity to borrow and
save with MFIs since they provide services that are cheaper than those that would normally be available
to poor clients or that would be entirely unavailable to them. Moneylenders charge very high interest
rates, often many times the rate charged by MFIs, and the moneylenders' terms may not be suited to the
Borrower. Micro entrepreneurs have consistently demonstrated that they will pay the full interest cost to
have continued access to financial services from MFIs.

3. Financial services contribute to women’s empowerment- Women entrepreneurs have attracted special
Interest from MFIs because they almost always make up the poorest segments of society, they have
fewer economic opportunities, and they are generally responsible for child-rearing, including education,

14
health and nutrition. Given their particularly vulnerable position, many MFIs seek to empower women
by increasing their economic position in society. Experience shows that providing financial services
directly to women aids in this process. Women clients are also seen as beneficial to the institution
because they are seen as creditworthy. Women have generally demonstrated high repayment and savings
rates.

4. Savings-One additional means for promoting household welfare is the development of facilities for
safe but liquid savings deposits. Early microfinance programs were not effective in mobilizing savings
and showed little interest in doing so. Partly, it was thought that poor households were too poor to save.
But recent microfinance experience shows that even poor households are eager to save if given
appealing interest rates, a conveniently located facility, and flexible accounts—with bankers in
Indonesia and South Asia finding that convenience generally trumps interest rates. From an institutional
viewpoint, incorporating savings mobilization in microfinance programs makes sense for a variety of
reasons.
• First, it can provide a relatively inexpensive source of capital for re-lending.
• Second, today’s depositors may be tomorrow’s borrowers, so a savings program creates
a natural client pool.
• Third, building up savings may offer important advantages to low-income households
directly: households can build up assets to use as collateral, they can build up a reserve to
reduce consumption volatility over time, and they may be able to self-finance investments rather
than always turning to creditors.

5. Support institutions, not projects. Microfinance has made a clear shift away from the limited-duration
projects of the 1970s and 1980s when donors usually subsidized the credit to the borrowers. Providing
credit at subsidized rates through the project approach was problematic for a number of reasons. It
turned out to be costly and unsustainable because loans were viewed as charity and were rarely paid
back. The funds were quickly depleted before they could reach many people. Another shortcoming was
that donors often specified target groups related to geographical location, gender, poverty level or
economic activity. These externally imposed objectives were difficult to accomplish and often resulted
in failure. Finally, training for health, education, social empowerment or business skills was also often
provided along with the credit. Training, too, proved to be costly, patronizing and a waste of clients’
time. Because of the problems inherent in the project approach, a new viable alternative was needed.
This resulted in a move towards a financial- systems approach, which stresses the creation of institutions
rather than projects to meet the financial needs of the poor on a sustained basis.

15
Impact of Microfinance in Terms of Female Empowerment and Education

Any review of microfinance is incomplete without a discussion of its impact on women. The
Microcredit Summit Campaign Report (2000) lists over a thousand programs in which 75 percent of the
clients were women. Yunus (2003) recounts the initial difficulties overcoming the social mores in rural
Bangladesh and lending to women in this predominantly Islamic nation. However, his efforts were
rewarded and 95 percent of the Grameen Bank’s current clients are women. This focus on women
follows largely from Yunus’s conviction that lending to women has a stronger impact on the welfare of
the household than lending to men. This has been confirmed by a large volume of research on
microfinance. In countries where microfinance is predominant, country-level data reveal signs of a
social transformation in terms of lower fertility rates and higher literacy rates for women. Pitt and
Khandker (1998) show that loans to women have a positive impact on outcomes such as children's
education, contraceptive use, and the value of women's non-land assets. Khandker (2005) finds that
borrowing by a woman has a greater impact on per capita household expenditure on both food and non-
food items than borrowing by a man. Among other things, this also improves nutrition, health care, and
educational opportunities for children in these households. Smith (2002) validates this assertion using
empirical data from Ecuador and Honduras to compare microfinance institutions that also offer health
services with institutions that offer only credit. He notes that, “in both countries, health bank
participation significantly raises subsequent health care over credit-only participation.” In particular, he

16
found that participation in MFIs that offer health services reduces the tendency to switch to bottle
feeding as incomes rise. He notes that breast-feeding children under age two is a key health-enhancing
behavior. A pro-female bias in lending works well for the MFIs. Practitioners believe that women tend
to be more risk averse in their choice of investment projects, more fearful of social sanctions, and less
mobile (and therefore easier to monitor) than men—making it easier for MFIs to ensure a higher rate of
repayment. Various studies from both Asia and Latin America have shown that the repayment rates are
significantly higher for female borrowers compared with their male counterparts. However, critics have
argued that microfinance has done little to change the status of women within the household. A much-
cited paper by Goetz and Gupta (1996) points to evidence that it is mostly the men of the household
and not the women borrowers who actually exercise control over the borrowings. Moreover,
microfinance does little to transform the status of women in terms of occupational choice, mobility, and
social status within the family. Therefore, microfinance hardly “empowers” women in any meaningful
sense.

LITERATURE REVIEW

Microfinance – A Way Forward. Thankom Arun, 1 David Hulme, 2October 2008

This paper1 identifies key processes shaping the microfinance sector in the coming decades. The paper
examines the geography of microfinance, highlighting differing evolution patterns and challenges across
the world. It looks at the widespread adoption of a financial systems approach in the microfinance
sector.This is set to continue because of two main processes: a shift in focus from poverty-lending
towards financial service provision; and the involvement of formal banks in microfinance. The paper
looks at the increasing focus on graduation programmes to support ultra-poor people, linking
microfinance to social protection and other services. It outlines the great potential of new, low-cost ICT
products to enable the development of new microfinance services. Finally, the need to regulate
microfinance is discussed.

GLOBAL RECESSION AND MICROFINANCE IN DEVELOPING COUNTRIES: THREATS

AND OPPORTUNITIES

Roberto Moro Visconti, March 24h, 2009

The global recession which started in 2008 after the subprime crisis and the unprecedented default or
rescue of many financial institutions has strongly affected the credibility of the international banking
system, damaging also the real economy. Due to this joint crisis, the credit crunch is severely affecting
the economy in Western globalized countries. Developing countries, not fully integrated with
international markets, seem less affected and local microfinance institutions might also allow for a

17
further shelter against recession, even if foreign support to donor driven NGOs or not fully independent
microfinance banks is slowing down and collection of international capital is harder and more
expensive. Intrinsic characteristics of microfinance, such as closeness to the borrowers, limited risk and
exposure and little if any correlation with international markets have an anti-cyclical effect. In hard and
confused times, it pays to be little, flexible and simple.

Marrying Microfinance to Small-holder Agriculture

- B.S.Suran and P.Satish121 November 2005
Large numbers of small farms coupled with many resource limitations make crop diversification a
difficult proposition in India. Though, contract farming systems do offer a solution by reducing the risk
for the producers as well as processors, but, farmer enrolments are generally limited to large farms only
in such contract farming arrangements. However, no contracts are said to be fool proof as both the
partners’ exhibit opportunistic behavior in maximizing returns, this brings to fore the problems of
moral hazard and adverse selection. This paper suggests a conceptual framework for getting small-
holder agriculturists into crop diversification, which is a key ingredient in agriculture transformation in
India. Cooperative models and models based on microfinance improvisations do offer a scope for broad
based relationship models that doesn’t terminate with contracts and facilitates greater participation of
small-holder agriculturists. The framework suggested charts the role of intermediaries like aggregators.
The paper argues that fair contract systems can be achieved if the farmer power is aggregated to
mutually benefit and enable more longer and sustained relationships.

Financial Development and the Efficiency of Microfinance Institutions

March 2009Niels Hermes
This paper investigates whether the country-level financial environment in which microfinance
institutions (MFIs) have to work affects their operations. In particular, we argue that the efficiency of
MFIs is determined by the extent to which financial markets of countries are developed. On the one
hand, well-developed financial markets provide an environment in which MFIs are able to flourish and
increase their efficiency. On the other hand, however, well-developed financial markets may also
substitute for MFIs, which reduces demands for their services, thus potentially reducing their efficiency.
Given the fact that the relationship may go both ways, we empirically investigate the direction of the
relationship between measures of financial development and measures of MFI efficiency, using data for
435 MFIs over the period 1997-2007.

Efficiency of Microfinance Institutions: A Data Envelopment Analysis

Michael Skully
This study examines the cost efficiency of 39 microfinance institutions across Africa, Asia and the Latin
America using non-parametric data envelopment analysis. Our findings show non-governmental
microfinance institutions particularly; under production approach, are the most efficient and this result is
consistent with their fulfillment of dual objectives: alleviating poverty and simultaneously achieving
financial sustainability. However, bank-microfinance institutions also outperform in the measure of
efficiency under intermediation approach. This result reflects that banks are the financial intermediaries
and have access to local capital market. It may be possible that bank microfinance institutions may
outperform the non-governmental microfinance institutions in the long run.

18
Efficiency Analysis of Microfinance Institutions in Developing Countries
M. Kabir Hassan and Benito Sanchez
October 2009
This paper investigates technical and scales efficiencies of microfinance institutions (MFI) in three
regions: Latin America countries, Middle East and North Africa (MENA) countries, and South Asia
countries, and compares efficiencies across regions and across type of MFIs. We find that technical
efficiency is higher for formal MFIs (banks and credit unions) than non-formal MFIs (nonprofit
organizations and non-financial institutions). Furthermore, South Asian MFIs have higher technical
efficiency than Latin American and MENA MFIs. The source of inefficiency is pure technical rather
than scale, suggesting that MFIs are either wasting resources or are not producing enough outputs
(making enough loans, raising funds, and getting more borrowers).

A Model of Microfinance With Adverse Selection, Loan Default, and Self-Financing1

Amitrajeet A. Batabyal2
We analyze a market for microfinance in a region of a developing nation in which all projects are either
of high or low quality. There is adverse selection because only borrowers know whether their project is
of high or low quality but the microfinance institutions (MFIs) do not. The MFIs are competitive, risk
neutral, and they offer loan contracts specifying the amount to be repaid only if a borrower's project
makes a profit. Otherwise, this borrower defaults on his contract. Design/methodology/approach: We
use a game theoretic model that explicitly accounts for adverse selection and then we study the trinity of
adverse selection, loan default, and self-financing.

Microfinance and Small Deposit Mobilization Fact or Fiction

June, 2009, Richard Meyer
Two primary arguments can be made for voluntary deposit mobilization among microfinance
institutions (MFIs). 2 First, deposit mobilization is an alternative source of funds that was neglected by
most MFIs until a few years ago. From this perspective, voluntary deposit mobilization helps MFIs
achieve independence from donors and investors, which is particularly important in periods of liquidity
constraints. Second, poor households benefit greatly from having access to deposit mechanisms, and the
benefits can be even greater than those derived from access to credit.3 On the funding side, the industry
has demonstrated great progress, with savings mobilization now representing more than half of the
assets reported by deposit mobilizing MFIs, even though this share seems to have decreased a bit during
the last three years. Since voluntary deposit mobilization has become an important source of funding for
the microfinance industry, the main question explored in this paper is whether deposit mobilizing MFIs
are really serving small depositors. Most microfinance observers automatically assume that all voluntary
deposit mobilization by MFIs would be from small size accounts, and, hopefully, from depositors with
similar socioeconomic traits as the clients they reach with their other services. 4 But until now, no one

19
has addressed the question of depth of outreach of deposit mobilization on a global scale as is routinely
done for microloans.

Microfinance and Poverty Reduction in Asia and Latin America

John Weiss and Heather Montgomery
September 2004
the current enthusiasm among the donor community for microfinance programs, rigorous research on the
outreach, impact and cost-effectiveness of such programs is rare. Design of aid programs would ideally
incorporate evidence on all three points, but the research that does exist generally focuses on only one of
these criteria: either outreach, impact or cost-effectiveness. In part this reflects the difficulty of
establishing an appropriate statistical methodology and implementing those standards in practice, and in
part no doubt reflects the variation found in practice in the way in which microfinance operates. The
evidence surveyed here suggests that the conclusion from the early literature, that whilst microfinance
clearly may have had positive impacts on poverty it is unlikely to be a simple panacea for reaching the
core poor, remains broadly valid. Reaching the core poor is difficult and some of the reasons that made
them difficult to reach with conventional financial instruments mean that they may also be high
risk and therefore unattractive microfinance clients.

Should banks in Palestine invest in microfinance market

Osama K. Najjar ,Palestine 12/2009
This study is prepared for academic & scientific purposes only and is not intended for investment or
commercial purposes. The data and information contained in this study are taken from published sources
so, the author dose not bears any responsibility for any error or mistake stated in the study. All analysis
and recommendations in the study reflect the opinion of the author only.

Is Microfinance Growing Too Fast?

Adrian Gonzalez
The aggregate number of borrowers served by microfinance institutions (MFIs) reporting to MIX
Market (www.mixmarket.org) grew 21 percent per year on average in the 2003-2008 period, while the
loan portfolio grew 34 percent per year on average in the same period.2 For many microfinance
practitioners and analysts, this level of growth is a reason for celebration, as it points towards
microfinance’s success in increasing access to financial services for poor and low-income households
and businesses. This paper quantifies the point at which the level of growth appears to overstretch MFI
resources and at which portfolio quality begins to decline for any higher growth level. This issue is
important in order for microfinance institutions to understand the trade-offs between growth and
portfolio quality. One additional question explored is whether the growth strategy has a significant effect
on portfolio quality. In particular, this paper distinguishes between local growth (growth in the number
of borrowers per branch) versus expansive growth (growth in the number of branches per MFI) and
tries to measure how much is too much for each case, and whether differences in the growth path chosen
by MFIs matter. Finally, the analysis concludes with a review of the market context in which MFIs are
building their borrower bases and the extent to which that context impacts portfolio quality.

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OBJECTIVES
1. POVERTY ELIMINATION BY MICROFINANCE
The interest in microfinance has burgeoned during the last two decade , multilatral lending
agencies ,bilateral donor agencies , developing and developed country government s, and non-
government organizations (NGOs ) all support the development of microfinance. A variety of private
banking institutions has also joined this group in recent years. As a result , microfinance services
have grown rapidly during the last decade , although from an initial low level, and have come to the
forefront of development discussions concerning poverty reduction. Despite this growth, as concluded
in the recently completed Rural Asia Study, “rural financial market s in Asia are ill -prepared for
the twenty - first century”. About 95 percent of some 180 million poor households in the Asian
and Pacific Region still have little access to institutional financial services . Development
practitioners, policy makers, and multilateral and bilateral lenders, however, recognize that providing
efficient microfinance services for this segment of the population is important for a variety of reasons.

• Microfinance can be a critical element of an effective poverty reduction strategy.

Improved access and efficient provision of savings, credit, and insurance facilities in
particular can enable the poor to smoothen their consumption, manage their risks better, build
their assets gradually, develop their microenterprises, enhance their income earning
capacity, and enjoy an improved quality of life. Microfinance services can also contribute to the
improvement of resource allocation, promotion of markets, and adoption of better technology;
thus, microfinance helps to promote economic growth and development.

21
 • Without permanent access to institutional microfinance, most poor households continue
to rely on meager self-finance or informal sources of microfinance, which limits their ability
to actively participate in and benefit from the development opportunities.

• Microfinance can provide an effective way to assist and empower poor women, who
make up a significant proportion of the poor and suffer disproportionately from poverty.

• Microfinance can contribute to the development of the overallfinancial system through

integration of financial markets.

Developing countries in the Region have used microfinance services to reduce poverty. About 21
percent of the Grameen Bank borrowers and 11 percent of the borrowers of the Bangladesh Rural
Advancement Committee, a microfinance NGO, managed to lift their families out of poverty within
about four years of participation.

4. These services also had a significant positive impact on the depth (severity) of poverty among the
poor. Extreme poverty declined from 33 percent to 10 percent among Grameen Bank participants, and
from 34 percent to 14 percent among Bangladesh Rural Advancement Committee participants.
Without exclusively targeting the poor, the unit desas of the Bank Rakyat Indonesia (BRI) have also
assisted “ hundreds of thousands of households in lifting themselves out of absolute poverty over the
past decade.”

5. A 1988 sample survey of unit desa borrowers showed that microcredit has had a major impact on
their families' standards of living. The study estimated that net household incomes of borrowers
increased by about 76 percent and employment increased by 84 percent with three years of program
participation.

6. The studies have ,in general, shown that microfinance services have also had a positive impact on
specific socioeconomic variables such as children’s schooling , household nutrition status, and
women’s empowerment.

7. Microfinance institutions (MFIs) have also brought the poor, particularly poor women, into the formal
financial system and enabled them to access credit and accumulate small savings in financial assets,
reducing their household poverty. However , researchers and practitioners generally agree that the
poorest of the poor are yet to benefit from microfinance programs in most countries partly because most
MFIs do not offer products and services that are attractive to this category.

8. Thus, to increase the overall impact of microfinance on poverty reduction , it is essential to

extend a wide range of services o n a continuing basis to the poor who are still excluded from the
benefits of microfinance.

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 Microfinance an Important Tool for Poverty Alleviation

Microfinance started as a method to fight poverty, and although microfinance still fulfil this goal,
several institutions have sought to make a distinction between the “marginally poor” and the “very
poor.” The broadest definition distinguishing these two groups comes from the Consultative Group to
Assist the Poorest (CGAP), which defines the poor as individuals living below the poverty line and the
poorest as the bottom half of the poor. The World Bank estimates that in 2001, some 1.1 billion people
had consumption levels below $1 and another 2.7 billion lived on less than $2 per day. As microfinance
continues to grow, questions have started to focus on who is the optimal client. Should microfinance
target the marginally poor or the extremely poor? Morduch (1999) tries to answer this question by
considering two representative microfinance clients, one from each poverty group described above. The
first client belongs to a subsidized microfinance program and her income is only 50 percent of the
poverty line. The second client belongs to a financially sustainable program that accordingly charges
higher interest rates. To ensure repayment of the loan at the higher rate,
the second borrower is chosen to be marginally poor, that is, with an income of 90 percent of the poverty
line. Using the widely used “squared poverty gap” (Foster, Greer, and Thorbecke, 1984)
measure of poverty, Morduch suggests that a dollar increase in income for the very poor borrower
has a five times greater impact than the same dollar for the marginally poor borrower. This simple
example would suggest that, in terms of poverty alleviation, MFIs should focus on the poorest borrowers
first, but this is not always the case. As MFIs seek to become financially independent, they find
themselves serving only the marginally poor. This is an important distinction between Grameen and
Banco Sol of Bolivia:
The latter’s emphasis is on returning a profit, and alleviating poverty is seen only as a secondary goal.
Not surprisingly, Banco Sol charges higher interest rates, does not rely on subsidies, and at the end of
2006 posted returns on equity of 22.8 percent.

From village to global success

It is widely acknowledged that microfinance is a key facilitator to reduce poverty in both developing and
developed countries. Modern microfinance had its roots in micro-lending initiatives in South Asia and
Latin America in the mid-1970s. Notably the Grameen Bank in Bangladesh was successful with its peer
group micro-lending model that was, ultimately, exported to many other countries and copied by other
MFIs. It was not before the early 1990s that a small part of the micro-lending business began to
increasingly transform itself from a donor-oriented model into formally regulated financial institutions
and that some commercial banks started to offer microfinance services. Currently, the steadily growing
popularity of microfinance has reached a global audience. The United Nations (UN) proclaimed 2005
the year of microcredit in an attempt to globally promote theMbenefits and potential of the microfinance
industry. In doing so, the UN acknowledged that, unlike top-down development initiatives such as debt
forgiveness or international aid, microfinance stands out for its bottom-up approach. It emerges locally
and enables micro-borrowers to improve their situation through their own efforts rather than relying on

23
external development strategies. In their collectivity, micro-loans lead to large-scale economic
improvements and foster growth in target countries. In 2006, Prof. Yunus and the Grameen Bank were
awarded the Nobel Peace Prize for their “efforts to create economic and social development from
below”. The Nobel committee honoured the contribution microcredit has made to the advance of
democracy and human rights worldwide.

2nd OBJECTIVE

PROGRAMME OF GOVERNMENT OF INDIA

Arranging fixed deposits for MFIs/NGOs: Under this scheme government of India arrange money to
MFI/NGO like SIDBI for micro credit to poor.

Training and studies on micro-finance programme: Government of India would help SIDBI in meeting
the training needs of NGOs, SHGs, intermediaries and entrepreneurs and also in enhancing awareness
about the programme

. Institution building for ‘intermediaries’ for identification of viable projects: The Government of India
would help in institution building through identification and development of ‘intermediary
organization’, which would help the NGOs/SHGs in identification of product, preparation of project
report, working out forward and backward linkages and in fixing marketing/ technology tie-ups. The
SISIs would help in the identification of such intermediaries in different areas Budgetary provision for
the scheme during 10th plan: There was a budgetary provision in 10th five year plan and hoping more
funds in next plan. Administrative arrangement: A committee has been formed to control and monitor
the administrative arrangement of MFI/NGOs Creating self employment opportunities is one way of
attacking poverty and solving the problems of unemployment. There are over 24 crore people below the
poverty line in our country. The Scheme of Micro-finance has been found as an effective instrument for
lifting the poor above the level of poverty by providing them increased self-employment opportunities
and making them credit worthy. A basic effort of last decade, the microfinance objectives in India has
reached at top point similar to Bangladesh. With some effort substantial progress can be made in taking
MFIs to the next orbit of significance and sustainability. There is a need of Designing financially

24
sustainable models and increase outreach and scale up operations for poor in India. People belong to
villages are still unaware about banking policies and credit system. So NGO should communicate to
them and share their view with villagers. Banks should convert and build up professional system into
social banking system for poor. Government of India and state governments should also provide support
for capacity building initiatives and ensure transparency and enhance credibility through disclosures.
Creating self employment opportunities is one way of attacking poverty and solving the problems of
unemployment. There are over 24 crore people below the poverty line in our country. The Scheme of
Micro-finance has been found as an effective instrument for lifting the poor above the level of poverty
by providing them increased self-employment opportunities and making them credit worthy. A basic
effort of last decade, the microfinance objectives in India has reached at top point similar to Bangladesh.
With some effort substantial progress can be made in taking MFIs to the next orbit of significance and
sustainability. There is a need of Designing financially sustainable models and increase outreach and
scale up operations for poor in India. People belong to villages are still unaware about banking policies
and credit system. So NGO should communicate to them and share their view with villagers. Banks
should convert and build up professional system into social banking system for poor. Government of
India and state governments should also provide support for capacity building initiatives and ensure
transparency and enhance credibility through disclosures. Creating self employment opportunities is one
way of attacking poverty and solving the problems of unemployment. There are over 24 crore people
below the poverty line in our country. The Scheme of Micro-finance has been found as an effective
instrument for lifting the poor above the level of poverty by providing them increased self-employment
opportunities and making them credit worthy. A basic effort of last decade, the microfinance objectives
in India has reached at top point similar to Bangladesh. With some effort substantial progress can be
made in taking MFIs to the next orbit of significance and sustainability. There is a need of Designing
financially sustainable models and increase outreach and scale up operations for poor in India. People
belong to villages are still unaware about banking policies and credit system. So NGO should
communicate to them and share their view with villagers. Banks should convert and build up
professional system into social banking system for poor. Government of India and state governments
should also provide support for capacity building initiatives and ensure transparency and enhance
credibility through disclosures.

Micro Finance Services

We are seeing a new type of loan methodology being evolved that is somewhat of a hybrid in nature. It
considers itself in the business of improving livelihoods, in which ‘livelihood financial services’ is one
piece. It places equal emphasis on the provision of agricultural business development services and
technical services in addition to the provision of financial services, which includes credit but is not
limited to it. Credit is not sufficient alone to guarantee an improvement in the livelihoods of the rural
poor. It is believed that other financial and technical services are necessary and can be provided on a
revenue model in order to be sustainable. Therefore Micro-Finance Institutions were structured in dia.

25
The different organizations in this field can be classified as "Mainstream" and "Alternative" Micro
Finance Institutions (MFI).

Types of Microfinance
institutions

Alternative
Mainstream
micro finance
Micro finance
institutions
Institutions

1. Mainstream Micro Finance Institutions

NABARD, Small Industries Development Bank of India (SIDBI), Housing Development Finance
Corporation (HDFC), Commercial Banks, Regional Rural Banks (RRBs), the credit co-operative
societies etc are some of the mainstream financial institutions involved in extending micro finance.

2. Alternative Micro Finance Institutions

These are the institutions, which have come up to fill the gap between the demand and supply for
microfinance. MFIs were recently defined by the Task Force as "those which provide thrift, credit and
other financial services and products of very small amounts, mainly to the poor, in rural, semi-urban or
urban areas for enabling them to raise their income level and improve living standards."

The MFIs can broadly be classified as:

NGOs, which are mainly engaged in promoting self-help groups (SHGs) and their federations at a
cluster level, and linking SHGs with banks, under the NABARD scheme.

NGOs directly lending to borrowers, who are either organised into SHGs or into Grameen Bank style
groups and centres. These NGOs borrow bulk funds from RMK, SIDBI, FWWB and various donors.

26
MFIs which are specifically organised as cooperatives, such as the SEWA Bank and various Mutually
Aided Cooperative Thrift and Credit Societies (MACTS) in AP.

MFIs, which are organised as non-banking finance companies CFTS, Mirzapur and SHARE Microfin
Ltd.

A Conceptual Model Let’s take a virtual MicroCredit Financing unit XYZ Corporation. Let it be an
organization which brings together both , the organizational structures of an Nonbanking Finance
Corporation(NBFC) like Samruddhi , and an NGO (Indian Grameen Services (IGS)) under a holding
company in order to give itself the benefit of both donor funds for research and development as well
greater access to commercial sources of funding.

The functions of XYZ operations are 3 fold

1. Firstly, XYZ targets small enterprises for employment creation through the provision of individual
loans with collaterized security to the top of its customer pyramid, the non poor.

2. It then targets the middle of the pyramid, micro-entrepreneurs and small farmers whom we might
estimate are the marginally poor or vulnerable with individualized loans to join liability groups
(Grameen Model). 3. For the bottom of its pyramid, whom we estimate are the “poorest of the poor,”
XYZ offers loans to self-help-groups for onlending to members.

Explaning this Triad

In terms of demand for micro-credit, there are three segments:

1. 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.

2. 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.

3. 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

27
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.If XYZ is indeed able to provide a
much wider range of services to a wider range of poor individuals , it would provide compelling reasons
for considering the benefits of MFIs becoming NBFCs but also retaining a nonprofit arm for the
purpose of preserving one of the largest benefits of an NGO-MFI, the ability to innovate through
researching and testing products that could enhance the lives of the poor in India. XYZ’s Program
Design

The main objectives of a Neo-Hybrid microfinance unit such as one taken above wil include the
following:

• Catalyze market-oriented MFIs through direct investment

• Attract additional independent service providers by demonstrating the viability of the market.This
hopes to bridge the gap between the current state of microfinance in India and the positive social impact
that catalyzing microfinance can have on India's communities and families

A Neo-Design Model

In this model we propose a basic concept of a Microfinance unit combined within a structure of a
NBFC . Its main aim must be to :

1. Catalyze and grow access to microfinance in India's rural areas. Directly invest in market-oriented
MFIs to serve millions of clients in India's villages over the next 10 years

2. Attract additional independent service providers by demonstrating the viability of the microfinance
market through measurable results .

3. Invest in a portfolio of financially sound, operationally effective, microfinance start-up institutions to

bring financial services to the poor.

4. Bring commercial banks to the table from the inception of the MFIs to ensure they are configured to
support rapid growth through access to expanding commercial sources of funds

5. Attract new leaders who can combine world class management skills with the vision for massive
social impact to build scalable institutions to serve the millions of poor micro-entrepreneurs

FEW SCHEME OF A GOVERNMENT OF INDIA

There are so many schemes for the upliftment of poor In India. One of them Micro-credit programmes is
run primarily by NABARD in the field of agriculture and SIDBI in the field of Industry, Service and
Business (ISB). The success of Micro-credit programme lies in diversification of services. Micro
Finance Scheme of SIDBI is under operation since January, 1999 with a corpus of Rs. 100 crore and a
network of about 190 capacity assessed rated MFIs/NGOs. Under the programme, total amount of Rs.
191 crore have been sanctioned upto 31st December, 2003, benefiting over 9 lakh beneficiaries. Under

28
the programme, NGOs/MFIs are supposed to provide equity support in order to avail SIDBI finance. But
they find it difficult to manage the needed equity support because of their poor financial condition. The
problem has got aggravated due to declining interest rate on deposits. The office of the development
commissioner (Small Scale Industries) under Ministry of SSI is launching a new scheme of Micro
Finance Programme to overcome the constraints in the existing scheme of SIDBI, whose reach is
currently very low. It is felt that Government’s role can be critical in expanding reach of the scheme,
ensuring long term sustainability of NGOs / MFIs and development of Intermediaries for identification
of viable projects.

http://www.academicjournals.org/AJBM/PDF/pdf2009/Apr/Shastri.pdf

http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/88991.pdf

http://mpra.ub.uni-muenchen.de/3675/1/MPRA_paper_3675.pdf

(www.laghuudyog.com/schemes/microfinance.htm)

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