Estimates of household credit demand vary from a minimum of Rs. 2,000 to Rs. 6,000 in rural areas and Rs.

9,000 in urban settings. SHG member households received an average of Rs. 1766 in credit. Hence, not only did the bulk of demand remain unmet, but borrowers generally received smaller loans than they required. Banks disbursed Rs. 97 billion in credit to the poor, while MFIs and NABARDs SHG Bank-Linkage program disbursed Rs. 1.4 billion covering 20 percent of estimated demand. More recent data suggests that while the gap between supply and demand may be shrinking, it continues to exist. In March 2003, outstanding loans of the SHG Bank-Linkage Program amounted to Rs. 10 billion while MFIs held Rs. 2.4 billion in loans outstanding Microfinance services remain predominantly in the form of credit and do not address the poors need for saving and insurance services. Regulation prevents most MFIs from mobilizing savings, and insurance schemes are limited. In terms of scope, the microfinance sector in India is concentrated in the southern states of Andhra Pradesh, Tamil Nadu, Karnataka, and Kerala, with Andhra Pradesh alone encompassing 50 to 70 percent of microfinance activities. Banks prompted by priority lending targets and more recently by profit motivation, are increasingly investing in microfinance. To date, however, they have shown little or no interest in retail microfinance, and the predominant providers of microfinance services in India continue to be SHGs and MFIs. In some cases has bought out their portfolio in lieu of opening microfinance retail branches directly. Over the last forty years, the Reserve Bank of India (RBI) has encouraged a significant expansion of bank branches in rural areas. Despite general support for microfinance, there appears to be a tension between promotion of the sector and client protection. RBI has thus forbidden MFIs from taking public savings that would reduce their cost of capital. Andhra Pradeshs (AP) Mutually Aided Cooperative Societies Act --- APs populist mandate, however, sometimes serves to undermine credit, as is exemplified by the decision that farmers need not repay the principle on a loan for the first six months, unless they are borrowing from a bank. Role of NABARD: In addition to concessional refinancing for banks, NABARD provides its partners with policy guidance and capacity building support.

 The SIDBI Foundation for Micro Credit (SFMC) was established in 1999 to promote the growth and sustainability of the microfinance sector by providing a range of financial and non-financial services to MFIs, including loan funds, grant support, equity, and institution building support. Interest Rate: High

Sustainability
Current Sources of Funds: Sa-Dhan (an association of Indian MFIs) reports that donor funds account for only nine percent of funds among its members, with the majority of funds coming from the banking sector

SHGs vs. Grameen Methodology: the long run The cost of creating and sustaining new and high-quality SHGs can be as much as Rs. 10,000 (US$220) per group, though NABARD estimates it to be one-tenth as much. Though banks generally lend to SHGs at interest rates between 12 and 12.5 percent, one study finds the all-inclusive costs to rural banks of forming and lending to SHGs translate into interest rates between 22 and 28 percent per year, even up to 48 percent. To the extent this is the case, rural banks may be lending to SHGs at a loss, making longterm sustainability an issue.

SHGs are too reliant on the whims of bank managers. SHGs tend to build relationships with specific bank staff that do not normally have a development role. SHG development within commercial or rural banks tends to occur to the extent that a committed staff member is at a given bank at a given time. lack of MFI capacity is the number one obstacle to scaling up outreach. There is a need for staff training in accounting and management information systems (MIS), financial management, personnel management, and business planning. Younger MFIs typically require support (financial and technical) in building adequate MIS systems.

Grameen-style MFIs have an average operational self-sufficiency of 109 percent, compared to 67 percent for SHGs.

Regulatory Framework
Microfinance Act
absence of a unified microfinance act uniting MFIs under a single regulating authority with a standard set of guidelines, regulation of microfinance in India is somewhat disjointed. MFIs are classified and governed according to the legal act under which they incorporated. An estimated 80 percent or more of the 2,000 MFIs in India are registered as philanthropic societies and essentially unregulated. Commercial Banks, Cooperative Banks, Regional Rural Banks, Non-Banking Financial Companies (NBFCs), Credit Cooperatives, or Mutually Aided Cooperative Societies, and may be strictly supervised by the Reserve Bank of India, NABARD, or state authorities drafting a microfinance act : under way A single regulating body could require standardized financial disclosure based on international best practices. Ultimately this should make well-performing MFIs more visible to potential investors or donors. the rate at which they lend to MFIs or at which MFIs lend to clients is not regulated Some in the industry support a rate cap in the interest of consumer protection, but most prefer to allow MFIs the ability to set rates as they see fit, and allow competition to drive them down.

Savings
MFIs registered under the Societies Act face virtually no financial disclosure requirements. They are prohibited from legally collecting savings, but it is widely acknowledged that many MFIs mobilize deposits on behalf of their clients Money collected :This money is deposited in group accounts for clients in a commercial bank, while in other cases the money is collected into a trust which is invested in the MFI.

 gray area within the law which highlights the need for the poor to access savings services to keep their money in a safe, convenient place; and the need for MFIs to lower their cost of capital. Under Indian regulations MFIs wishing to collect savings typically transform into NBFCs. NBFCs must be at least one year old before they can collect deposits, and then only if they have received at least an investment grade credit rating. There is a limit on the terms of deposits that NBFCs can accept: the interest rate paid on deposits cannot be more than 11 percent and no deposits for less than 12 months or more than 60 months can be accepted minimum capital requirement of Rs. 20 million (approx. US$440,000 considerably higher than found in many other developing countries) and a lengthy application process, this is not an easy leap to make RBI is thought to purposefully drag its feet on the applications so as to limit the number of NBFCs it is required to oversee., India suffered a number of NBFC failures in recent years savings might be better approached through alternative models, such as credit unions.

Regulations on Investment
Even without the ability to collect deposits some MFIs are finding it worthwhile to transform into NBFCs because it allows them to raise equity.

 Raising equity :Minimum foreign investment in an NBFC is set at US$500,000and must be matched by an equal amount of domestic equity as regulations prohibit majority foreign investment RBI in 2002 outlawed even borrowing from abroadincluding from donor agencies. This limits MFIs access to capital at preferential rates, a vital source of funds, and a potential source of quasi-equity, preventing them from leveraging more capital. With domestic loan rates starting at over 8 percent, borrowing abroad, even at commercial rates, can be of benefit to MFIs. MFIs also face restrictions on the receipt of foreign donations. In order to receive overseas grants they need permission from the Ministry of the Interior in accordance with the Foreign Contribution Regulation Act. it takes about two to three months to get a temporary permit under this regulation and the NGO is required to reapply for it every year for three years until it is granted a permanent permit.

Effectiveness of Kisan Credit Card, National Agriculture Insurance Scheme

Awareness on KCC: About 19 per cent of the sample KCC holders were not aware ofthe modalities, usefulness/ benefits of KCC scheme. Farmers have been issued KCC and sanctioned limits under KCC, but they were not aware of its positive aspects, like, revolving cash credit facility (RCCF) involving any number of drawals and repayments, credit limits for full year including ancillary activities related to crop production and other NFS activities, sub limit for consumption purposes, etc.

 Coverage of New farmers Every year certain percentage of new farmers were being brought to the KCC fold articularly more prominent during doubling of credit programme (200405 to 2006-07) as per the target prescribed by the controlling/head office of the bank

 Adequacy of Credit : the study revealed that, as many as 900 sample KCC holders, forming 48 percent of the total covered during field visit, felt that the credit limits sanctioned to them under KCC were not adequate.

The study revealed that no agency including Co-op. bank had been strictly following the scales of finance (SoF).

 Operational Flexibility : Majority of farmers (68%) had not gone for frequent operations on the limit sanctioned to them under the card and withdrew the sanctioned KCC limit at one go. Further, 11per cent and 21 per cent KCC holders had operated the KCC limit twice and more than twice, respectively. Credit Usage: Hassle Free Card Purchase of Inputs :useful in regards to reduced cost of accessing credit as compared to the earlier system of crop delivery system meeting credit requirements for crop cultivation for the whole year Availability of credit whenever the credit is needed flexibility in drawing cash/buying inputs from any supplier of choice reduction in quantum of interest due to drawal flexibility/ repayment reduction in cost of credit for availing the bank loan insurance cover (NAIS/PAIS) at a very low premium rate

Effectiveness of National Agriculture Insurance Scheme

The National Agricultural Insurance Scheme (NAIS) was introduced in the country from the rabi season of 1999-2000. It covers all food grains, oilseeds and annual horticultural / commercial crops for which past yield data are available for an adequate number of years The scheme is operating on the basis of both area approach, for widespread calamities, and individual approach, for localized calamities such as hailstorm, landslide, cyclone and floods. Coverage of NAIS: Country Level: It covered 5.8 lakh farmers and 7.8 lakh hectares of cropped area. The number of farmers increased from 84.1 lakhs in kharif 2000 to 129.3 lakhs by kharif 2006 and the area coverage reached 196.7 lakh hectares from 132.2 lakh hectares during this period The average premium rate of Rs 3.03 indicates the dominance of risky crops in the crop area insured during the kharif season.

Reach and Impact of NBFC

A significant degree of fragmentation has been seen in the NBFC sector which is inundated with a large number of small and weak entities unable to withstand any adverse developments in their operating environment due to their fragile financial position.