 Microfinance is a general term to describe

financial services to low-income individuals or to

those who do not have access to typical banking
services.

 "Microfinance is the supply of loans, savings, and

other basic financial services to the poor.“
 A microfinance institution (MFI) is an
organization that provides microfinance services.
MFIs range from small non-profit organizations
to large commercial banks.
 The Micro Finance Institutions (MFIs) accesses
financial resources from the Banks and other
mainstream Financial Institutions and provide
financial and support services to the poor.
 The concept of microfinance is not new.

 Savings and credit groups that have operated for

centuries include the "susus" of Ghana, "chit
funds" in India, "tandas" in Mexico, "arisan" in
Indonesia, "cheetu" in Sri Lanka, "tontines" in
West Africa
 One of the earlier micro credit organizations
providing small loans to rural poor with no
collateral was the Irish Loan Fund system,
initiated in the early 1700s by Jonathan Swift.
 In the 1800s, various types of larger and more
formal savings and credit institutions began to
emerge in Europe, organized primarily among the
rural and urban poor
 Between the 1950s and 1970s, governments and
donors focused on providing subsidized
agricultural credit to small and marginal farmers,
in hopes of raising incomes.

 During the 1980s, micro-enterprise credit

concentrated on providing loans to poor women
to invest in tiny business.
 These experiments resulted in the emergence of
NGOs that provided financial services for the
poor.

 In the 1990s, many of these institutions

transformed themselves into formal financial
institutions in order to access and on-lend client
savings, thus enhancing their outreach.
 To improve the quality of life of the poor by
providing access to financial and support
services.
 To be a viable financial institution developing
sustainable communities.
 Learn and evaluate what helps people to move
out of poverty faster.
 To create opportunities for self-employment for
the underprivileged.
 To mobilize resources in order to provide
financial and support services to the poor.
 To train rural poor in simple skills and enable
them to utilize the available resources and
contribute to employment and income generation
in rural areas.
 Microfinance is increasingly being considered as
one of the most effective tools of reducing
poverty.
 Helps in achieving financial inclusion.
 understanding the needs of the poor and on
devising better ways of delivering services in line
with their requirements.
 SKS microfinance-secunderabad based
 Spandan sphoorthy financial ltd-hyderabad based
 Share microfin ltd-hyderabad based
 Asmitha microfin ltd-hyderabad based
 Bandhan microfinance-kolkata based
Present demographic status in india:

•India is a developing country having more than 1000 million population out
of which 350 million people are still below poverty line.

•Only 20% access loan from the formal sources and80% from the informal
sources.

•70 percent of rural people do not have a bank account.

•Less than 15 percent have any access to any kind of insurance.

•Out of that 20% only 10%have access to Micro finance.

•The genesis of microcredit, and therefore microfinance is credited to Dr. Muhammad
Yunus, who founded the Grameen Bank in 1983.

•In India, however, financial services especially for the rural poor also had a parallel
evolution, starting from the earliest cooperative societies in 1890 to the burgeoning
microfinance sector of today.

•The SHG – Bank linkage programme was formally launched by the NABARD in the
year 1992, under a Pilot Project.
•This aimed at financing 500 SHGs across the country through the banking system.

•Good response encouraged the Reserve Bank of India (RBI) to include financing to SHGs as
a mainstream activity of banks under their priority sector lending in 1996.

•Microfinance received greater recognition when the Small Industries Development Bank of
India set up a Foundation for Microcredit with initial capital of Rs100 crores in 1998.
• The passing of Mutually Aided Cooperative Societies
Act by Andhra Pradesh in 1995, followed by some other
states has also acted as a stimulant as many new
microfinance initiatives have come up under the MACS
act.

•In addition to the success of the Nabard-SHG bank

linkage programme, alternative microfinance initiative
following Grameen and/or SHG methodology or at times
individual lending model has also been successful. 
•About 60 percent of MFIs ARE REGISTERED as societies.

•About 20 percent are trusts.

•Large concentration in south india.

•600 MFIS INITIATIVES HAVE A CUMULATIVE OUTREACH OF 1.25 CRORE POOR

HOUSEHOLDS

•NABARDS BANK LINKAGE PROGRAM HAS CUMUTATIVELY REACHED A TOTAL OF

9.4 LACH SHGS WITH ABOUT 1.4 CRORE HOUSEHOLDS.
Strength
•Helped in reducing the poverty.
•Huge networking available.

Weakness
•Not properly regulated.
•High number of people access to informal sources of finance.

Opportunity
•Huge demand and supply gap.
•Employment Opportunity.
•Huge Untapped Market.
•Opportunity for Pvt. Banks, NBFCs, Foreign Banks to enter this business segment.
On basis of lending:

Non profit organizations:

societies : bandhan,rashtriya seva samiti,Gram utthan
Public trusts
Non profit companies

Mutual profit:
Co operatives registered understate or national acts(sakh sahkari samiti ltd.,
Mutually aided co operative societies(MACs) such as sewa mutually aided cooperative.

For profit MFIs

NBFCs such as bhartiya sammrudhhi finance limited .
producer companies
local area banks
The SHG model

Grameen bank model

NBFC model
The self help group model has evolved in the NGO sector. A variety of models arise
out of NGO nurturing among which SHGs have become the most popular.

SHGs are small informal groups comprising of membership of 10-20 persons. The
composition of membership is mostly exclusively male or exclusively female with all
members having economically and socially similar background.

 The group meets regularly at an appointed time and place and carries out its
financial transactions of savings and credit.

The NGO provides them with support services, training and developing linkages.
However, there are certain features of SHG that need to be looked into:

•The group promotion process is long and the poor have to wait for long periods.

•The amounts available in the beginning are very small and all the members cannot take
loans at the same time.

•The functioning of the group relies completely on group dynamics which are very
difficult to build in.

•Conflicts arise on seemingly trivial reasons which can lead to the break-down of the
group and it is difficult to rebuild it.
The grameen bank methodology which was a case of exceptional
success first evolved in Bangladesh and was launched by many
other organizations in India with slight variations. Some of the
features are as follows:

•Homogeneous groups of 5 members are formed at village level

•The field worker facilitates the process of group forming

•All the group members undergo a 7 day compulsory training

•Some groups undergo the group recognition test

•8 joint liability groups affiliate together to form a centre

•The centre meets every week at a defined time and a bank assistant attends the meetings.

•Group discipline is enforced through peer pressure. Collateral is replaced by peer pressure.

• The incentive to timely repayment is repeat loans and continuous access to increasing credit
from the bank.

•A field worker maintains a check on loan utilization.

The four pillars of microfinance credit system (Fig. 1) are supply, demand for
finance, intermediation and regulation. Whatever may the model of the
intermediary institution, the end situation is accessibility of finance to poor. The
following tables indicate the existing and desired situation for each component. 
 •

Existing Situation Desired Situation

•fragmented •Organized
•Undifferentiated •Differentiated
•Addicted, (for consumption,
corrupted by housing)
capital & subsidies •Deaddicted from
•Communities not capital & subsidies
aware of rights •Aware of rights
and and
responsibilities responsibilities
 •

Existing Situation Desired Situation

•Grant based •Regular fund sources
(Foreign/GOI) (borrowings/deposits)
•Directed Credit - •Demand responsive
unwilling and corrupt •Part of mainstream
•Not linked with (banks/FIs)
mainstream •Add savings and
•Mainly focussed for insurance
credit •Reduce dominance of
•Dominated informal, unregulated
suppliers
 •

Existing Situation Desired Situation

•Non specialized •Specialized in
•Not oriented to financial services
financial analysis •Thorough in
•Non profit capital financial analysis
•Not linked to •For profit
mainstream FIs •Link up to FIs
•Not organized •Self regulating
 •

Existing Situation Desired Situation

•Focussed on formal •include/informal
service providers recognise e.g. SHGs
(informal not •Regulate rules of
regulated) game
•regulating the wrong •Coherence and
things e.g. interest coordination across
rates regulators
•Multiple and •Enabling
conflicting (FCRA, environment
RBI, IT, ROC,
MOF/FIPB,
ROS/Commerce)
•Negatively oriented
 INTEREST RATE MISNOMER-when
small amounts are discussed percentages
can be misleading. MFI's charge 24-30 per
cent interest rate.
 COLLECTION PRACTICES-need to arrive at
the right balance between strictly enforcing group
liability and allowing exceptional defaults.

 MULTIPLE LENDING-customers borrow from

many MFIs.
 BETTER REGULATION
-Cap the directors' and top management's
salaries.
-Cap the return on assets or return on equity
expectations.
-Closely monitor MFIs, as in the case of
banks.
-Help the sector access debt cheaper.
 Government has imposed strict norms for lending
and recovery practices to be followed by the
mfis.
 Microfinance major SKS is in trouble due to
it.the companies activities are on a hault from the
last quarter.
 It recorded a steep drop of 38.1% in its net profit
yoy.
 Many small companies are planning to shut down
there operations because of the margin pressures
since interest rates have also gone down
significantly.
•It is estimated that in next five years 65 percent people
will have access to micro finance.

•Many private banks and foreign banks will enter this

sector due to low NPAs and reinforcement through RBIs
new licensing norms.

•According to world bank report around 5% people will

get above poverty line.
Finally we firmly believe that in a developing
country especially like india where two
worlds exist together people are rich by
thoughts and talent but poor by money,
microfinance acts as one of the most
powerful tool against poverty.