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Microfinance An Overview
A PROJECT REPORT ON MICROFINANCE AN OVERVIEW
H.R COLLEGE OF COMMERCE AND ECONOMICS CHURCHGATE, MUMBAI-400020
SUBMITTED BY RADHIKA.S.ALREJA T.Y.B.M.S. (SEMESTER V)
PROJECT GUIDE PROF.NAVIN PUNJABI
SUBMITTED TO UNIVERSITY OF MUMBAI
ACADEMIC YEAR - 2010-2011

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CERTIFICATE
I, Prof. NAVIN PUNJABI hereby certify that RADHIKA.S.ALREJA of H.R.College of Commerce and Economics of T.Y.B.M.S. (Semester V) has compiled this project, titled MICROFINANCE AN OVERVIEW in the academic year 2010-2011. The information submitted is true and original to the best of my knowledge.
Signature of the Principal (DR.MRS INDU SHAHANI)
Signature of the project guide (PROF.NAVIN PUNJABI)
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DECLARATION
I, RADHIKA.S.ALREJA of H. R. College of Commerce and Economics of T.Y.B.M.S. (Semester V) hereby declare that I have compiled this project, titled MICROFINANCE AN OVERVIEW in the academic year 2010-2011.
The information submitted is true and original to the best of my knowledge
Signature of the student RADHIKA.S.ALREJA
Date: 25-11-2010
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Acknowledgements
If words are considered as a symbol of approval and token of appreciation then let the words play the heralding role expressing my gratitude. During the perseverance of this Project, I was supported by different people, whose names if not mentioned would be inconsiderate on my part. I take this opportunity to express my profound gratitude and deep regard to my faculty guide Prof. NAVIN PUNJABI for his exemplary guidance, valuable feedback and constant encouragement throughout the duration of the project. His valuable suggestions were of immense help throughout my project work. His perceptive criticism kept me working to make this project in a much better way. Working under him was an extremely knowledgeable experience for me. I would also like to give my sincere gratitude to all my college librarian staff because of whom I am able to complete my dream project. Last but not least, I would like to thank my parents and my friends for their support and feelings without which this project would have not been possible.
RADHIKA.S.ALREJA
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Executive Summary
When one thinks of microfinance, one attributes it to the innovative model of Grameen Bank in Bangladesh. However, microfinance has its roots way back in history. Immense similarities are visible in the chit funds, sub-prime lending and the co-operative movements around the world. The microfinance sector developed due to the failure of direct aid methods and charities to the poor. In India, initial moves towards microfinance can be seen with the SEWA Bank in 1972. Since then, the sector has seen exponential growth and has helped boost entrepreneurial spirit in the country. One can truly say that commercial microfinance may be well on its way to being a separate asset class. But, the future of microfinance lies in providing a regulatory base for the sector so as to keep an eye watch on the activities of the sector. This is needed as microfinance shares a number of similarities with sub-prime lending that has led the entire world in to recession. More so, its needed since microfinance places its bet on group dynamics, instead of collateral. Commercial microfinance has seen a number of SRIs (Socially Responsible Investors) putting in their surplus money. This calls for developing a model for measuring a social impact as these SRIs are looking at a mix of social as well as economic returns on their investments. Various technologies are helping the MFIs to carry out transactions in an effective and efficient manner, also saving on time and avoiding errors. We also look upon two cases India and SKS microfinance an MFI to understand this topic better. Certain instances showing the success in the microfinance industry in India are also mentioned towards the end of the project. Highlights on the financial performance of MFIs in India in 2010 are mentioned Sa Dhan Report.
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TABLE OF CONTENTS:
Particulars Certificate Declaration Acknowledgement Executive Summary List Of Abbreviations Chapter 1:Research Methodology 1.1 Objective Of The Study 1.2 Scope Of Microfinance 1.3 Research Methodology Chapter 2: Introduction 2.1 Definition 2.2 The Concept Of Microfinance 2.3 Microfinance Approach 2.4 Understanding The History Of Microfinance 2.5 Clients Of Microfinance 2.6 Activities In Microfinance 2.7 Need Of Microfinance 2.8 Microfinance Institutions 2.9 Models Of MFI Chapter 3: How Microfinance Empower Poor 3.1 Poverty Allevation 3.2 Work And Microfinance 3.3 Empowering Women Chapter 4: Regulation 4.1 Whats Wrong With The Regulations We Have? 4.2 Regulation By Risk 4.3 Elements Of Microfinance Regulation 12 12 13 14 19 20 21 22 24 26 28 30 31 2 3 4 5 8 Page.No
9 10 11
33 34 37
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4.4 Microfinance Regulation In India Chapter 5: The Role Of Microfinance Rating Agencies Chapter 6: Subprime Lending Lessons For The Microfinance Industry 6.1 Subprime Loans And Predatory Lending 6.2 Commercial Microfinance- Avoiding The Pitfalls 6.3 Characteristics Of Microfinance Shares With The Subprime Market 6.4 Recommendations Of Investors And Others Chapter 7 : Microfinance Technology 7.1 Graditim 7.2 Beam Chapter 8: Case Studies 8.1 Case - India 8.2 Case SKS Microfinance Chapter 9: Bottlenecks In Microfinance
40 41
43 47 47 48
50 53
54 65 72
Chapter 10: Impact 10.1 Instances Of Microfinance Success In India 75 10.2 Microfinance Sector Growth For 2009 In India 77 10.3 Highlights From The Sa-Dhan Report About The 79 Financial Performance Of Indian MFIs In 2010 10.4 Conclusion 80 Bibliography 81
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List of Abbreviations
1. H. R. College Hassaram Rijhumal College 2. SHG Self-help Group 3. A/C Account 4. SKU Stock Keeping Unit 5. MFI Micro Finance Institution 6. SCA Sustainable Competitive Advantage 7. BAB Business Advisory Board 8. WMM Word of Mouth Marketing 9. SOBO South Bombay 10. PRO Public Relations Officer 11. PR Public Relations 12. JIT Just In Time 13. MIV- Microfinance Investment Vehicle 14. .NGO Non-governmental Organisation 15. ILO International Labour Organisation
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CHAPTER 1: RESEARCH METHODOLOGY
Objective of the Study:

Now- a days, Micro-finance is the buzz word all over. Every single day, every news magazine, every entrepreneur, every business newspaper mentions this word in some way or the other. The major objective of this project was to understand the concept of microfinance, its history, its applications, its importance its need and impact of it in todays world. Poverty in India is a major issue. Rural Indians depend on unpredictable agriculture incomes, while urban Indians rely on jobs that are, at best, scarce. Since its independence, the issue of poverty within India has remained a prevalent concern. As of 2010, more than 37% of Indias population of 1.35 billion still lives below the poverty line. More than 22% of the entire rural population and 15% of the urban population of India exists in this difficult physical and financial predicament. As we can see from the above data that nearly half of our population still lives below the poverty line, we have to in some way try to overcome this major problem of our country. Microfinance, being one of the solutions to help eradicate poverty.
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Scope of Microfinance:
Microfinance scope can be seen in terms of outreach it has. By outreach we mean that how much a microfinance institution is reaching poor people in remote and distant areas? Another term which could possibly determine the scope of microfinance is substantiality. Substantiality means a microfinance institution covering its cost from revenues it realizes. Together outreach and substantiality determine scope of microfinance institution. Although practitioners of microfinance advocate a balance between these two objectives there is wide different institutions built up in market. Some of them are minimalist in using minimum profit orientation while others are pure social no-for-profit organizations. Microfinance experts agree that women should be primary focus of service delivery. Evidence shows that loan defaults for men are than women. Men are considered riskier than females. This conclusion is sometimes questioned. A recent study of Sri Lankan micro-entrepreneurs shows that return on capital employed for men is about 11% while females was 0% or slightly negative. MFIs scope has not been properly spelled out. Wide differences occur among various academics about MFIs scope. However poor in this world are more than richer. There are poor people in both developed world and developing world. Financial Needs of Poor People Needs of poor people are classified into certain categories. Which are ; Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding, widowhood, old age. Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death. Disasters: such as fires, floods, cyclones and man-made events like wars, bulldozing etc. Investment Opportunities: such as expanding business, buying land or equipment, improving housing, securing job (which often requires paying large bribes) etc.
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Research Methodology:
To make this project majority of the information is compiled using secondary data. The data is collected from the internet using various sites, newspapers and news magazines. Also the reports of a few MFIs have been referred to compile this data. Since, most of the topnotch MFIs are outside Mumbai it was difficult to visit them and get primary data. But nevertheless, technology combats this problem and most of the data required was available on their website. A detailed list of the sources has been provided in the bibliography.
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CHAPTER 2: INTRODUCTION
MICROFINANCE DEFINITION:
According to International Labour organization (ILO), Microfinance is an economic development approach that involves providing financial services through institutions to low income clients
THE CONCEPT OF MICROFINANCE

Microfinance in simple terms is a medium of providing financial services usually in form of lending small amounts of money at lower interest rates to low-income clients who lack access to banking service, to empower the underprivileged class of the society to build assets, stabilize consumption and be able to protect themselves against risks. Microfinance is the provision of a broad range of financial services and products such as credit, savings and insurance designed to assist poor people who lack access to financial services in the mainstream banking sector to develop their small businesses, save their earnings, and guard against risks. More broadly, it is a movement whose object is "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers .These methods include group lending and liability, pre-loan savings requirements, gradually increasing loan sizes, and an implicit guarantee of ready access to future loans if present loans are repaid fully and promptly. This enables them to be self-employed by starting their own small business ventures .The main idea behind microfinance is that poor people, who can provide no collateral, should have access to some sort of financial services. Microfinance began with micro credit which is the provision of small loans to very poor families to help them engage in productive and self-sustaining activities. The aspect of microfinance that has contributed to its success is its
'credit-plus' approach - where the focus has not only been on providing adequate and timely credit to low income groups, but to integrate it with other developmental activities such as
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community organizing and development, leadership training, skills and entrepreneurship management, financial management etc. The success and sustainability of microfinance programmers is depended upon, and has fostered, on these aspects.
MICROFINANCE APPROACH
The principles of microfinance are founded in the philosophy In the principles of cooperation and its central values of equality, equity, and mutual self help for the ultimate target of human development. Microfinance approach is based on certain proven truths which are not always recognized. These are: That the poor are bankable; successful initiatives in micro finance demonstrate that there need not be a tradeoff between reaching the poor and profitability - micro finance constitutes a statement that the borrowers are not weaker sections in need of charity, but can be treated as responsible people on business terms for mutual profit That almost all poor households need to save, have the inherent capacity to save small amounts regularly and are willing to save provided they are motivated and facilitated to do so That easy access to credit is more important than cheap subsidised credit which involves lengthy bureaucratic procedures - some institutions in India are already lending to groups at higher rates - this may prevent the groups from enjoying a sufficient margin and rapidly accumulating their own funds, but members continue to borrow at these high rates, even those who can borrow individually from banks 'Peer pressure' in groups helps in improving recoveries
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Understanding the History of Microfinance

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, and "pasanaku" in Bolivia, as well as Numerous savings clubs and burial societies found all over the world.
Formal Credit and savings institutions Formal credit and savings institutions for the poor have also been around for decades, providing customers who were traditionally neglected by commercial banks a way to obtain financial services through cooperatives and development finance institutions. One of the earlier and longer-lived micro credit organizations providing small loans to rural poor with no collateral was the Irish Loan Fund system, initiated in the early 1700s by the author and nationalist Jonathan Swift. Swift's idea began slowly but by the 1840s had become a widespread institution of about 300 funds all over Ireland. Their principal purpose was making small loans with interest for short periods. At their peak they were making loans to 20% of all Irish households annually.
The movement in Germany 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. These institutions were known as People's Banks, Credit Unions, and Savings and Credit Co-operatives. The concept of the credit union was developed by Friedrich Wilhelm Raiffeisen and his supporters. Their altruistic action was motivated by concern to assist the rural population to break out of their dependence on moneylenders and to improve their welfare. From 1870, the unions expanded rapidly over a large sector of the Rhine Province and other regions of the German States. The cooperative movement quickly spread to other countries in Europe and North America, and eventually, supported by the cooperative movement in developed countries and donors, also to developing countries.
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1900s rural Latin America In the early 1900s, various adaptations of these models began to appear in parts of rural Latin America. While the goal of such rural finance interventions was usually defined in terms of modernizing the agricultural sector, they usually had two specific objectives: increased commercialization of the rural sector, by mobilizing "idle" savings and increasing investment through credit, and reducing oppressive feudal relations that were enforced through indebtedness. In most cases, these new banks for the poor were not owned by the poor themselves, as they had been in Europe, but by government agencies or private banks. Over the years, these institutions became inefficient and at times, abusive. 1950s and 1970s subsidized schemes Between the 1950s and 1970s, governments and donors focused on providing agricultural credit to small and marginal farmers, in hopes of raising productivity and incomes. These efforts to expand access to agricultural credit emphasized supply-led government interventions in the form of targeted credit through state-owned development finance institutions, or farmers' cooperatives in some cases, that received concessional loans and on-lent to customers at below-market interest rates. These subsidized schemes were rarely successful. Rural development banks suffered massive erosion of their capital base due to subsidized lending rates and poor repayment discipline and the funds did not always reach the poor, often ending up concentrated in the hands of better-off farmers. 1970s Experimental programs Latin America, India, Bangladesh Meanwhile, starting in the 1970s, experimental programs in Bangladesh, Brazil, and a few other countries extended tiny loans to groups of poor women to invest in micro-businesses. This type of microenterprise credit was based on solidarity group lending in which every member of a group guaranteed the repayment of all members. These "microenterprise lending" programs had an almost exclusive focus on credit for income generating activities (in some cases accompanied by forced savings schemes) targeting very poor (often women) borrowers
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ACCION International, an early pioneer, was founded by a law student, Joseph Blatchford, to address poverty in Latin America's cities. Begun as a student-run volunteer effort in the shantytowns of Caracas with $90,000 raised from private companies, ACCION today is one of the premier microfinance organizations in the world, with a network of lending partners that spans Latin America, the United States and Africa.
SEWA Bank in 1972 the Self Employed Women's Association (SEWA) was registered as a trade union in Gujarat (India), with the main objective of "strengthening its members' bargaining power to improve income, employment and access to social security." In 1973, to address their lack of access to financial services, the members of SEWA decided to found "a bank of their own". Four thousand women contributed share capital to establish the Mahila SEWA Cooperative Bank. Since then it has been providing banking services to poor, illiterate, selfemployed women and has become a viable financial venture with today around 30,000 active clients.
Grameen Bank in Bangladesh, Professor Muhammad Yunus addressed the banking problem faced by the poor through a programme of action-research. With his graduate students in Chittagong University in 1976, he designed an experimental credit programme to serve them. It spread rapidly to hundreds of villages. Through a special relationship with rural banks, he disbursed and recovered thousands of loans, but the bankers refused to take over the project at the end of the pilot phase. They feared it was too expensive and risky in spite of his success. Eventually, through the support of donors, the Grameen Bank was founded in 1983 and now serves more than 4 million borrowers. The initial success of Grameen Bank also stimulated the establishment of several other giant microfinance institutions like BRAC, ASA, Proshika, etc. Through the 1980s, the policy of targeted, subsidized rural credit came under a slow but increasing attack as evidence mounted of the disappointing performance of directed credit programs, especially poor loan recovery, high administrative costs, agricultural development bank insolvency, and accrual of a disproportionate share of the benefits of subsidized credit to
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larger farmers. The basic tenets underlying the traditional directed credit approach were debunked and supplanted by a new school of thought called the "financial systems approach", which viewed credit not as a productive input necessary for agricultural development but as just one type of financial service that should be freely priced to guarantee its permanent supply and eliminate rationing. The financial systems school held that the emphasis on interest rate ceilings and credit subsidies retarded the development of financial intermediaries, discouraged intermediation between savers and investors, and benefited larger scale producers more than small scale, low-income producers.
Meanwhile, microcredit programs throughout the world improved upon the original methodologies and defied conventional wisdom about financing the poor. First, they showed that poor people, especially women, had excellent repayment rates among the better programs, rates that were better than the formal financial sectors of most developing countries. Second, the poor were willing and able to pay interest rates that allowed microfinance institutions (MFIs) to cover their costs.
1990s These two features - high repayment and cost-recovery interest rates - permitted some MFIs to achieve long-term sustainability and reach large numbers of clients. The 1990s saw growing enthusiasm for promoting microfinance as a strategy for poverty alleviation. The microfinance sector blossomed in many countries, leading to multiple financial services firms serving the needs of micro entrepreneurs and poor households. These gains, however, tended to concentrate in urban and densely populated rural areas. It was not until the mid-1990s that the term "microcredit" began to be replaced by a new term that included not only credit, but also savings and other financial services. "Microfinance" emerged as the term of choice to refer to a range of financial services to the poor, that included not only credit, but also savings and other services such as insurance and money transfers.
BancoSol ACCION helped found BancoSol in 1992, the first commercial bank in the world dedicated
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solely to microfinance. Today, BancoSol offers its more than 70,000 clients an impressive range of financial services including savings accounts, credit cards and housing loans - products that just five years ago were only accessible to Bolivia's upper classes. BancoSol is no longer unique: more than 15 ACCION-affiliated organizations are now regulated financial institutions.
Today Today, practitioners and donors are increasingly focusing on expanded financial services to the poor in frontier markets and on the integration of microfinance in financial systems development. The recent introduction by some donors of the financial systems approach in microfinance which emphasizes favourable policy environment and institution-building - has improved the overall effectiveness of microfinance interventions. But numerous challenges remain, especially in rural and agricultural finance and other frontier markets. Today, the microfinance industry and the greater development community share the view that permanent poverty reduction requires addressing the multiple dimensions of poverty. For the international community, this means reaching specific Millennium Development Goals (MDGs) in education, women's empowerment, and health, among others. For microfinance, this means viewing microfinance as an essential element in any country's financial system.
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CLIENTS OF MICROFINANCE
The typical microfinance clients are low-income persons that do not have access to formal financial institutions. The Microfinance clients are typically self-employed, often householdbased entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in small income-generating activities such as food processing and petty trade. In urban areas, microfinance activities are more diverse and include shopkeepers, service providers, artisans, street vendors, etc. Microfinance clients are poor and vulnerable non-poor who have a relatively stable source of income. Access to conventional formal financial institutions, for many reasons, is inversely related to income: the poorer you are the less likely that you have access. The poor often obtain financial services from informal financial relationships - credit can be available from commercial and noncommercial lenders, but often at very high interest rates; saving services can be available through savings clubs, credit associations and the like. As a result, the chances are that, the poorer you are, the more expensive or onerous informal financial arrangements .This arises the need of microfinance. Microfinance generally targets poor women because they have proven to be reliable credit risks and when they have the financial means, they invest that money back into their families, resulting in better health and education, and stronger local economies. By providing access to financial services - loans and responsibility for repayment, maintaining savings accounts, providing insurance - microfinance programs send a strong message to households and communities.
As the definition of the types of services microfinance encompasses broadens, the potential market of microfinance clients also expands. For instance, micro credit might have a far more limited market scope than say a more diversified range of financial services which includes various types of savings products, payment and remittance services, and various insurance products. For example, many very poor farmers may not really wish to borrow, but rather, may like a safer place to save the proceeds from their harvest which gives rise to the concept of micro
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savings .This expansion of services hugely depends on several factors such as activeness of cooperatives, and several other factors support mechanism .
ACTIVITIES IN MICROFINANCE
MICROCREDIT Micro credit is the provision of small or micro loans to poor people not served by banks because of their poverty, lack of collateral, illiteracy or lack of formal identification documents. These individuals lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the most minimal qualifications to gain access to traditional credit. Micro credit is a part of microfinance, which is the provision of a wider range of financial services to the very poor. It helps them to rise from poverty through entrepreneurship .The concept of micro credit emerged firstly when it was introduced in Bangladesh by Grameen bank in 1970s.
MICRO SAVINGS Micro savings are deposit services that allow the client to save small amounts of money without any requirement of minimum deposit balances.These usually help to meet unexpected future expenses.
MICRO INSURANCE It is a system by which people and business organizations take out policies carrying small amounts as premium to share risks and protect against certain future calamities.
REMMITTANCES These are transfer of funds by people from one place to another usually to family or friends. Remittances are a steady source of funds.
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Need for Microfinance

Micro finance is needed at the household, community and regional levels. But a greater need for 100% financial inclusion is being felt because poor people are trapped in poverty. The reasons being: Commercial banks not lending them money as they are often neither in a position to offer collaterals nor are they considered creditworthy enough Local money-lenders, who are often their only source of credit, charge exorbitantly high interest rates, thereby depleting them of whatever little possible savings they can manage.
Generally microfinance is sought by small and marginal farmers, the economically weaker sections etc. Women constitute a vast majority of users of microcredit and micro savings facilities. Indias rural poor are dependent on agriculture as their primary source of income. The majority are marginal or small farmers, and the poorest households are landless. Thus they have uncertain and irregular income streams and expenditure patterns. Here the need for micro finance is felt. In Urban areas, people have a very temporary address and are mobile because the slums being evacuated. Also, unsteady livelihoods lead to migration from one part of the city to another or from one city to another. The KYC norms require a proof of identity and residence, which urban poor cannot provide- They remain excluded from formal nance unless a voter identity card or a migrant identity card is issued to them. Housing loans are not taken off in a big way because of large volume of loans required and long period of repayment.
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Microfinance Institutions:
Microfinance is increasingly being considered as one of the most effective tools of reducing poverty. Microfinance has a significant role in bridging the gap between the formal financial institutions and the rural poor. The Micro Finance Institutions accesses financial resources from the Banks and other mainstream Financial Institutions and provide financial and support services to the poor.
Various types of institutions offer microfinance: credit unions, commercial banks, NGOs (Nongovernmental Organizations), cooperatives, and sectors of government banks. The emergence of for-profit MFIs is growing. In India, these for-profit MFIs are referred to as Non-Banking Financial Companies (NBFC). NGOs mainly work in remote rural areas thereby providing financial services to the persons with no access to banking services.
More than subsidies poor need access to credit. Absence of formal employment make them non `bankable'. This forces them to borrow from local moneylenders at exorbitant interest rates. Many innovative institutional mechanisms have been developed across the world to enhance credit to poor even in the absence of formal mortgage.
Indian MFIs range from Grameen-replicator NGOs to for-profit entrepreneurial ventures to developmental NGOs which moved from SHG promotion to direct financial intermediation. As far as the formal financial institutions are concerned, there are Commercial Banks, Housing Finance Institutions (HFIs), NABARD, Rural Development Banks (RDBs), Land Development Banks Land Development Banks and Co-operative Banks .
As regards the Co-operative Structures, the Urban Co.op Banks or Urban Credit Co.op Societies are the two primary co-operative financial institutions operating in the urban areas. There are about 1400 UCBs with over 3400 branches in India having 14 million members. Similarly there exist about60000 credit co-operative societies with over 40 million members with their total
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outstanding lending in 2009-10being Rs200billion with deposits of Rs 125 billion. The Government has taken several initiatives to strengthen the institutional rural credit system. The rural branch network of commercial banks have been expanded and certain policy prescriptions imposed in order to ensure greater flow of credit to agriculture and other preferred sectors. The commercial banks are required to ensure that 40% of total credit is provided to the priority sectors out of which 18% in the form of direct finance to agriculture and 25% to priority sector in favour of weaker sections besides maintaining a credit deposit ratio of 60% in rural and semiurban branches.
The informal financial sources generally include funds available from family sources or local money lenders. The local money lenders charge exorbitant rates, generally ranging from 36% to 60% interest due to their monopoly in the absence of any other source of credit for nonconventional needs. Chit Funds and Bishis are other forms of credit system operated by groups of people for their mutual benefit which however their own limitations have. Lately, few of the NGOs engaged in activities related to community mobilisation for their socioeconomic development have initiated savings and credit programmes for their target groups. These Community based financial systems (CBFS) can broadly be categorised into two models: Group Based Financial Intermediary and the NGO Linked Financial Intermediary.
The experience of these informal intermediaries shows that although the savings of group members, small in nature do not attract high returns, it is still practised due to security reasons and for getting loans at lower rates compared to that available from money lenders. These are short term loans meant for crisis, consumption and income generation needs of the members. The interest rates on such credit are not subsidised and generally range between 12 to 36%. Most of the loans are unsecured. In few cases personal or group guarantees or other collaterals like jewellery is offered as security. They support the old Chinese proverb,
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"Give a man a fish, he will eat for a day. Teach a man how to fish, he will eat for a lifetime".
TOP MFIS CRISIL

SKS MICROFINANCE LTD - SECUNDERABAD, AMDRA PRADESH SPANDANA SPHOORTY FINANCIAL LTD HYDERABAD,ANDHRA PRADESH SHARE MICROFIN LTD - HYDERABAD,ANDHRA PRADESH GRAMEEN FINANCIAL SERVICES PVT LTD BANGLORE, KARNATAKA
Models of MFI
Lending model: Here the micro finance institutions lend to groups such as the self help groups (SHG) and the Joint reliability groups (JLR) and also to the individual
Loan repayment structure: Weekly or fortnightly repayment structure (JLR model) Monthly repayment structure (SHG model)
Mode of interest rate calculation: JLR model charges flat 12-18% interest on loans. SHG model charges 18-24% interest on reducing balance method
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Product offering: Micro credit, investments, insurance, saving, etc.
Legal structure: Cooperatives, NBFC, unregistered, societies, trusts, for-profit, non-profit.
For Example:
The Grameen Bank Model

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. Someof 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.
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CHAPTER 3: HOW MICROFINANCE EMPOWERS POOR

Money makes money. When you have got a little ,it is often easy to get more. The great difficulty is to get that little -ADAM SMITH The poor stay poor, not because they are lazy but because they have no access to capital .
In the absence of commercial bank loans, access to microfinance affords low income groups to receive loans for their economic activity. Programmes and organizations that provide credit to low-income groups make a clear match between the quality and quantity of credit, and the capacity of the poor to utilize that credit - at the same time being organizationally sustainable. The main idea behind microfinance is that poor people, who can provide no collateral, should have access to some sort of financial services. Microfinance began with micro credit: the provision of small loans to very poor families to help them engage in productive and selfsustaining activities .Unlike bank credit that emphasize large loans for long repayment periods at very low interest rates, microfinance loans are for short periods that are repaid quickly, and made available at interest rates that keep the programme sustainable and viable. To survive, many poor households run small businesses that operate on the margins of society, trying to sell what they can. However, these poor entrepreneurs lack capital to give their ambitions a chance. Traditionally, commercial banks consider them to be unreliable collateral or they live in isolated rural areas. Local moneylenders provide credit, but often at high cost to the borrower.
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Because they dont have any collateral Local moneylenders provide credit, but often at high cost to the borrower. This either discourages them from taking up self employment by starting their own business ventures or makes their business non profitable often even worsening their financial situation.
People living in poverty need a diverse range of financial services to run their businesses, build assets, stabilize consumption, and shield them against poverty. Microfinance can help lessen poverty in rural areas where the majority of poor people live. When rural poor people have access to credit, savings, insurance and other basic financial services , they can better manage their assets and generate income.
Microfinance is a powerful tool in the fight against poverty. It provides poor people with the means to work their own way out of poverty and is more secure and sustainable than many aid projects, with a longer and more lasting impact.
That microfinance can help the poor to increase income, build viable businesses, and reduce their vulnerability to external shocks. It can also be a powerful instrument for self-empowerment by enabling the poor, especially women, to become economic agents of change.
Poverty is multi-dimensional. By providing access to financial services, microfinance plays an important role in the fight against the many aspects of poverty. For instance, income generation from a business helps not only the business activity expand but also contributes to household income and its attendant benefits on food security, children's education, etc. Moreover, for women, who, in many contexts, are secluded from public space, transacting with formal institutions can also build confidence and empowerment.
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POVERTY ALLEVATION
Microfinance can be used as effective tools in fight against poverty. Families that participate in microfinance programs enjoy an increase in household income. In Indonesia a 12.9 per cent annual average
Rise in income from borrowers was observed while only 3 per cent rise was reported from Non borrowers. In Bangladesh, a 29.3 per cent annual average rise in income was recorded and 22 percent annual average rise in income from no-borrowers. Sri-Lanka indicated a 15.6 rise in income from borrowers and 9 per cent rise from non borrowers. While in case of India a 42percent rise in income of borrowers was reported against a mere 24 percent rise in income of non borrowers.
These case studies show that microfinance can significantly increase the income of poor households, which translates into better nutrition and health for impoverished families. The nutritional benefits are particularly felt by children. The remunerations from increase in
household income and better nutrition spill over into many other areas such as education ,health care etc which the poor are in need of help. This holistic impact of microfinance can help the poor to break the vicious circle of poverty. Grameen bank the largest and most renowned of microfinance institutions, with a membership of 2.4Million, reports: Over the course of a decadecompared with 18% of non members, 58% of the Grameen borrowers had crossed over the extreme poverty line Of the 42% of the Grameen borrowers who failed to cross the poverty line, fully 60% experienced serious illness in the family ,thus rising their health care expenses significantly .
Many microfinance programs target poor women. For women, money management, greater control over resources, and access to knowledge leads to more choices and a voice in family and community matters. Economic empowerment is accompanied by growth in self-esteem, self28 | P a g e
confidence, and new opportunities. Many qualitative and quantitative studies have documented how access to financial services has improved the status of women within the family and the community. Women often become more assertive and confident. In regions where women's mobility is strictly regulated, women have often become more visible and are better able to negotiate the public sphere. Women involved in microfinance may also own assets, including land and housing, and play a stronger role in decision making. In some programs that have been active over many years, there are even reports of declining levels of violence against women.
Thus the role of micro financing in India can be summarized as follows:
Micro-Finance proved to be a powerful instrument initiating a cyclical process of growth and development. Micro-Finance activity improved access of rural poor to financial services, both savings and credit.
Increased access signifies overcoming isolation of rural women in terms of their access to financial services and denial of credit due to absence of collateral. The pool of savings generated out of very small but regular contributions improved access of the poor women to bank loans. It could also help in strengthening poor families resistance to external shocks and reducing dependence on moneylenders.
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WOMEN AND MICROFINANCE
Although men, as well as women, face difficulties in establishing an additional enterprise, women have barriers to overcome. Among them are negative socio-cultural attitudes, legal barriers, practical external barriers, lack of education and personal difficulties.
In spite of this, for women and especially for poor women, microentreprise ownership has emerged as a strategy for economical survival. One of the most essential factors contributing to success in micro entrepreneurship is access to capital and financial services. For various reasons, women have had less access to these services than men.
In this context, credit for microentreprise development has been a crucial issue over the past two decades. Research has shown that investing in women offers the most effective means to improve health, nutrition, hygiene, and educational standards for families and consequently for the whole of society. Thus, a special support for women in both financial and non-financial services is necessary.
Regarding limited-access to financial services, women depend largely on their own limited cash resources or, in some cases, loans from extended family members for investment capital. Smaller amounts of investment capital effectively limit women to a narrow range of low-return activities which require minimal capital outlays, few tools and equipment and rely on farm produce or inexpensive raw materials.
In general, women need access to small loans (especially for working capital), innovative forms of collateral, frequent repayment schedules more appropriate to the cash flows of their enterprises, simpler application procedures and improved access to saving accounts.
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EMPOWERING WOMEN
All over the world, the significant of women entry into the workforce over the past three decades has produced profound transformations in the organisation of families, society, the economy, and urban life. Since the late 1950s, women's economic activities have been steadily increasing. Women have always actively participated in their local economies. In Africa, for example, women produce 80 percent of the food and in Asia 60 percent and in Latin America 40 percent. In many cases, women not only produce the food but market it as well, which gives them a welldeveloped knowledge of local markets and customers.
This is a small example of the importance of women's work in society. It does not illustrate the real extent of women's contribution, especially in developing countries, not only to the labour force, but also their role as a significant income-source for the family. For instance, in Africa all tasks related to a family's support are the responsibility of women. Due to cultural and traditional aspects, a woman's presence has been a question of survival of her family.
Women, especially poor mothers, must divide their time between work "productive role" and family "reproductive role", and balancing all the demands. Time is valuable for these women, as their livelihoods depend largely on their ability to fulfil the multiple demands of the household and the marketplace.
In spite of the remarkable importance of women's participation, their jobs have been considered as an "extra income" to family survival or simply to improve its living conditions. Moreover, micro enterprises owned by women have been considered as a way to meet primary needs instead of a profitable source of income.
Unfortunately, labour markets have followed this perception and have offered less favourable conditions to women. Women workers consistently earn less than their male partners do.
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Women have had to fight against an adverse environment, which traditionally had been minimising and exploiting their capacities. As a consequence of this reality, in some cases, women are just satisfied with the non-financial benefits, such as the psychological satisfaction of "social contact".
Considering the entrepreneurial environment, women's activities are very interesting as they offer a great source of knowledge and innovation. For example: there is no single type of female micro-entrepreneur, they differ in social background, educational level, experience and age. Another interesting factor is their strong social coherence that allows them to maintain strong communications-channels at all levels.
One important element, and perhaps the only characteristic that men will never have, is the possibility to transfer "motherhood skills" to job. These include fostering of other people's development through guiding, monitoring, and sharing information. Women are experienced in balancing claims, in organising and pacing, and in handling difficulties. In general terms, female-led micro enterprises tend to be associated with activities that provide part-time employment. They are small in size and have loose, informal structures, require very little start-up capital, and little or no formal education thus highly probable of being successful business ventures.
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CHAPTER 4: REGULATION
As the emerging asset class of microfinance spirals slowly to the surface, the sector looks at one of its main stumbling blocks: regulation and supervision. Vijay Mahajan, CEO of the BASIX Group, a microfinance institution (MFI) in India, refers to regulatory frameworks as one of the triple helix of constraints to microfinance expansion: regulation frameworks, financial resources, and the institutional capacity of most micro-banks, any of which may be the ruling constraint at a given time. BASIX, one of the first MFIs in the world to attract commercial equity investment internationally and within India, has been a major influence for successful changes in Indian policy framework.
As in mainstream financial sectors, predictable regulatory standards for microfinance reduce uncertainty and increase the attractiveness of the investment. The challenge is to strike a balance between preventing abuse of markets and consumers, and encouraging industry expansion. A case in point is Peru, a burgeoning market for microfinance in which regulators seemed to have figured out how to control risk while promoting investment in microfinance.
Whats Wrong With The Regulations We Already Have?

Some may be tempted by the relative ease of imposing a countrys existing financial laws and regulations on MFIs, but most are poorly suited to the unique aspects of microfinance. For example, most micro loans are unsecured and made to people without a documented credit history or identity. This could signal a higher reserve allocation, or may not even be legal in some countries. To the surprise of many, microcredit losses have been relatively low at well run MFIs, with recovery rates above 95 percent at some MFIs even in poor economic climates; whereas, many others have failed completely. Transaction costs are steep for both MFIs and customers, and business is often conducted at odd hours and in unusual places. Back office systems may not be automated and thus extremely labor intensive to maintain.
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There is no one-size-fits-all solution. Regulating microfinance is country-specific, and while there are several best practices and consensus guidelines to guide policy makers, implementation is complicated by the realities of an individual countrys political economy and the nature of emerging markets.
Lack of transferability of mainstream financial regulations is not necessarily bad. In many countries, the field has been able to grow and mature because of tacit government approval by failing to impose existing laws on MFIs. In countries that have implemented microfinance regulation smoothly and effectively, regulation has tended to follow, rather than lead, development of the industry.
Regulation By Risk
In industrialized nations, regulatory scrutiny tends to correlate with risk. If you engage in a high risk activity (real or perceived) with potential systemic repercussions, you will likely develop a close, personal relationship with the regulators.
Conversely, if you operate in an unremarkable way with little chance of disrupting markets or financial systems, your activities will normally attract little attention. Regulation by risk is a practical approach for microfinance, as well.
To maintain a level playing field, it makes sense to focus microfinance regulation and supervision on the activities themselves, regardless of the type of institution that delivers them. For example, oversight of micro-loans to poor borrowers should essentially be the same whether the loans are extended by an MFI (already broadly-defined), consumer finance company or commercial bank that offers the same product. Tax treatment of microfinance activities should also ensure a level playing field that does not unduly favor nonprofit providers who offer the same products and services as a commercial entity
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What Works: Peru For a taste of how regulation and supervision should work in practice, we turn to Peru. Strong loan demand paired with inadequate domestic funding has drawn socially-oriented investors to the region of Latin America since the early 1990s. Since 1998, nearly all of the growth in Latin American microfinance has been fueled by private investment. MFIs have been the fastest-growing financial institutions in Peru over the last decade.
Prudentially Speaking Prudential and non-prudential regulatory policies address the overall risk posed by the institution or activity being regulated. Prudential regulations protect an institutions financial soundness to prevent loss of small depositors money and damage to financial system confidence. Such prudential regulation is relatively difficult, intrusive and expensive because it involves understanding, monitoring and protecting the health of individual institutions. Examples of prudential regulation are capital, liquidity and loan loss reserve requirements. Prudential regulation is only needed for MFIs that accept retail consumer deposits or are large enough to pose a threat to the financial stability of other institutions. The goal is to protect the integrity of the financial system as a whole, and protect small depositors who are not independently able to assess the soundness of a financial institution.
Non-prudential regulations focus on transparency and disclosure and may be largely selfexecuting, and handled by agencies outside the central bank or finance ministry. Non-prudential measures include disclosing effective interest rates, screening out unsuitable owners and managers and requiring transparent reporting. This approach is appropriate for credit-only MFIs that do not accept retail deposits.
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Self-regulation and external audits in nations whose central banks and governments have not put their regulatory houses in order, some MFIs have developed their own self regulatory bodies to promote discipline and transparency.
According to Robert Peck Christen, Timothy R. Lyman, and Richard Rosenberg, authors of Guiding Principles on Regulation and Supervision of Microfinance, self-regulation of financial intermediaries in developing countries has been tried many times, and has virtually never been effective in protecting the soundness of the regulated organizations.
It is also appealing to think that MFI supervision can be delegated to external audit firms. Again, experience has shown that external audits of MFIs, while promoting transparency and disclosure, seldom include testing that is adequate to provide a reasonable assurance as to the soundness of the MFIs loan portfolio, which is by far the largest area of risk. This is true even with respect to internationally recognized audit firms.
The absence of credible alternatives to prudential and non-prudential oversight should not create a sense of urgency in establishing special microfinance regulations. Supervisory capacity in most developing and transitional industries is limited, and supervisors often have their hands full with a troubled banking system. It would be pointless to establish a comprehensive set of regulations without the ability to enforce them. In addition, premature or restrictive regulations stifle innovation.
Less Is More Policymakers seek a delicate balancing act between attracting private sector investment and protecting financial system integrity11. The key is to avoid using burdensome prudential regulations and to manage the risk presented by the specific microfinance activities. This is a crucial point, because the consequences of an improper degree of regulation and supervision can be profound.
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At the lax end of the spectrum, MFIs operate in regulatory limbo, with an unclear legal status, minimal oversight, questionable transferability of assets, inability to enforce contracts and unprotected minority investor rights.
At the heavy-handed end of the spectrum are systems that attempt to eliminate (versus manage) risk. These regimes impose interest rate controls, require excessive capital and reserves, restrict ownership to insiders or locals, distort competition through unequal tax treatment and require expensive compliance measures.
Elements Of Microfinance Regulation:

1. Legal status: Absence of basic registration and licensing requirements impedes the growth of the microfinance industry and its appeal as an investment. The most disappointing example is China, where despite impressive progress in other sectors, microfinance remains in its infancy for lack of an enabling framework. Time-limited licensing as practiced in the West Africa Monetary Union also creates uncertainty: if an MFI does not follow the standard cooperative model, it must operate under a revolving five year memorandum of understanding. 2. Secured transactions: Financial laws of emerging economies may not address an MFIs legal authority to pledge and enforce security interests, restricting the transferability of its assets in capital market transactions such as loan securitization. Without a clear rule of law allowing perfection of liens, assets could wind up being pledged more than once.
3. Loan terms: Individual borrower lending limits for microcredit are sometimes stated as a certain dollar amount that does not vary with changes in economic conditions, such as inflation. This means an MFI cannot grow with its customer, or diversify into related
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products such as home mortgages. A more enabling approach is to have flexible limits that move with GDP per capita or an MFIs core capital.
4. Interest rates: Public prejudice against exploitative interest rates is strong in many countries. Yet, experience shows that interest rate controls may serve local political interests but ultimately hurt the poor by cutting off access to credit. When an MFI cannot cover its costs, it will die, or worse, turn to permanent subsidies. This reduces availability of credit for poor borrowers, who are then at the mercy of the truly usurious. Strong consumer protection laws such as Truth in Lending type disclosures and consumer education would better help the poor to make informed choices.
5. Tax burden: In markets where for-profit and nonprofit MFIs compete for the same business, the playing field will be uneven when there is unequal tax treatment of the same activity. Policy should distinguish taxes on financial transactions from taxes on net profits that arise from such dealings. Specifically, taxes on financial transactions such as a value added tax on lending or a tax on interest rate should be equalized across the industry. Moreover, rules for net income or profit taxes such as tax-deductibility of expenses (such as provisioning for bad loans) should apply consistently to all types of institutions, regardless of whether they are prudentially licensed.
6. Capital and reserves: A certain threshold capital requirement is an effective hurdle for new licenses. However, if excessive capital and reserve requirements are based on a misperception of risk, then growth is hindered by a minor hidden tax that further distorts the playing field.
7. Minority interests: Minority investor shares may be protected from misappropriation through transparent disclosures, laws protecting small investor rights and the ability to enforce claims in court, or with a regulatory body. Minority investor rights can also be protected by placing board members and having access to shareholder lists, annual
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reports and board meeting minutes.
8. Cost of compliance: There are implicit costs in being a prudentially regulated MFI, including permissible funding sources, loan limits, interest rate caps and capital and reserve requirements, along with explicit costs such as reporting, audit, higher taxes and upfront legal and administrative costs (e.g. automation of back office systems). Often it is not cost effective for an MFI to become a regulated entity and is only warranted if the institution wants to attract retail deposits, which require sophisticated balance sheet management.
9. Restrictions on ownership: Governments may impose limits on proportional ownership to diversify an MFIs capital base and improve the odds of a successful capital call, if needed. Limits on foreign investors range from absolute prohibition (e.g. rural Philippines, Ethiopia) to a certain percentage (e.g. 49% in El Salvador), despite evidence that banks in developing countries with some foreign ownership outperform domestically owned banks. Restricting repatriation of profits by outside investors also effectively curbs foreign direct investment. While over the long term strong domestic capital markets are essential for financial sector development, current restrictions on overseas investors are stifling the growth of the microfinance industry. International investment funds may be better positioned to absorb risk than domestic investors, and early investors may have a demonstration effect, acting as a catalyst to jump start growth and pave the way for new investment sources.
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Microfinance Regulation In India

The purpose of the Microfinance Regulation Bill is to provide for the promotion, development and regulation of micro finance organisations in rural and urban areas and thereby for securing easy access to credit, thrift and other financial facilities of women and certain disadvantaged sections of the people, and for matters connected therewith or incidental there to.
The Microfinance Bill has been in the offing for a while now. In March 2008, the Finance Minister tabled the bill in the Lok Sabha, which was then referred to the Lok Sabha Standing Committee on Finance.
One of the primary criticisms of the bill has been that it excludes Non Banking Finance Companies (NBFCs) from its purview. Microfinance is provided through two channels in this country: through SHG-Bank Linkage and directly through MFIs. Of the MFI channel, NBFCs account for about 70% of total loans distributed and for 70% of total MFI membership (M-CRIL, 2007). Thus, excluding NBFCs is pretty much like excluding most people who are using microfinance in this country.
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CHAPTER 5: The Role Of Microfinance Rating Agencies

Perhaps the single most important development in microfinance investment to date is the participation of mainstream and specialty rating agencies. Pairing independent rating agency review with non-prudential licensing, transparency and governance requirements may be as fruitful, if not more so, than intrusive prudential regulations. Rating agencies have also begun to rate specific securities issued by MFIs. Making the case for rating agencies is Greg Casagrande, founder, chairman and president of South Pacific Business Development, an MFI that has attracted commercial funding from institutions such as Deutsche Bank, WestPac Bank and ANZ Bank. In his opinion, investing in microfinance is not much different than purchasing a public utility bond. Chances are you (the investor) have neither the resources nor the expertise to evaluate every aspect of the public utility business and the companys operations; instead, you would rely in large part on the facilitys rating. Similarly, microfinance investors need not concern themselves with analyzing individual loan files and a dizzying array of financial performance ratios when analysts with training and experience in the nuances of microfinance are better equipped to do so. In this way, microfinance rating agencies have done more to promote investorfriendly microfinance than virtually anyone else to date.
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Alas, most microfinance agencies are too small to afford a credit rating by the major firms. To date, the mainstream rating agencies (Moodys, Standard & Poors and Fitch) have rated just a handful of large MFIs, such as ProCredit of Germany, Compartamos of Mexico, Mibanco of Peru and Acleda of Cambodia.To fill the void, specialty rating agencies such as MicroRate, MCRIL and Planet Rating offer an alternative source. Most specialty agencies are heavily subsidized, although Planet Rating is an independent, for-profit entity recently spun off from PlaNet Finance, an NGO. The oldest specialty rating agency, MicroRate, dates to 1996. According to its website, MicroRate has analyzed over 203 MFIs in Latin America and Africa. Planet Rating has done 153 ratings missions in 35 countries worldwide. These agencies have begun to scratch the surface, but much work remains to be done. These are relative newcomers to the ratings game and the credibility of ratings comes from a solid track record over time.
Conclusion The state of regulation and supervision may appear to be in terrible disarray, but given the slow evolution of the microfinance industry in general, policy is where we might expect since in most countries less than 10 percent of low income households have access to basic savings and credit services. Remember, regulation follows, it doesnt lead. Until the relevant structures are in place to meet the demand for financial services for the bulk of the population, investors must content themselves with those precious few market leaders that understand the business of microfinance and how to protect both your investment and its citizens confidence.
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CHAPTER 6: SUBPRIME LENDING: LESSONS FOR THE MICROFINANCE INDUSTRY

With the collapse of the subprime credit market, investors and other players are asking if the same forces that drove this market also extend to commercial microfinance. Will the legitimate drive to maximize profits result in neglect (or abuse) of the interests of the borrowers, as it did in the subprime market? Will overabundant funding lead to irrational growth? Or will the interests of all stakeholders remain in balance as the commercial microfinance market evolves?
Subprime Loans And Predatory Lending

1. Subprime Loans, Benefiting Society Through the 1970s and most of the 1980s, only borrowers with substantial assets and strong credit histories had access to home mortgage loans. The 1980s brought deregulation of the mortgage market and tax reform, making higher cost loans (accompanied by tax savings) not only legal for lenders but also attractive to borrowers.
Lenders developed the subprime loan product in an effort to extend financial services to a broader market. As envisioned, customers with less-than perfect credit would qualify for subprime loans. The loans would carry higher interest rates than prime loans to compensate for increased credit risk. But the borrowers would become homeowners, following a traditional route into the middle class; and neighborhoods would become more stable, benefiting society as a whole.
The subprime residential mortgage market was a success (reaching USD 332 billion in 2003, up from USD 65 billion in 1995). Lenders bundled their inventories of subprime
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loans into pools for sale on the secondary market, relying heavily on borrowers credit history to measure risk and to price pools. Investors derived comfort that their risk was mitigated by diversification within these large pools (across geographic regions, property types, interest rates etc). Yields were very attractive, and the secondary market flourished (58.7% of the subprime loans originated in 2003 were sold into securitizations, up from 28.4% in 1995).
2. Impact of Competition
Lenders flocked to the lucrative subprime market and the increased competition drove down yields. They designed new products to attract additional residential mortgage clients. Entrepreneurs with irregular income flows but good credit histories and assets now qualified for low- or no-income- verification loans. Upwardly mobile borrowers stretching to buy that new home now qualified for interest-only loans. While these were valid products, they required careful marketing and underwriting in order to maintain an acceptable borrower risk profile in this financially vulnerable market. Wall Street structured more complex subprime securitizations, compensating for the increased risk with investor protections in the form of excess spread, subordinate bond classes, reserve funds and bond insurance. Investors were comfortable with the relatively low default rates and the constantly appreciating collateral. However continued strong performance was uncertain, as the loan products and deal structures were new and relatively untested. Furthermore, everyone knew the real estate bubble could not last forever. Specialized loan servicing firms managed the underlying mortgage loans. This industry also flourished, although it was challenged by both increasing delinquency rates and narrowing profit margins. A successful business strategy involved consolidation into ever-larger companies and adoption of more sophisticated technology. Now servicers could reduce costs by minimizing human intervention in the processing of delinquent
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loans. At the same time they could efficiently assess borrowers an array of processing and late fees.
3. Predatory Lending
Subprime lending is not synonymous with predatory lending. Many subprime lenders and servicers ran sustainable, profitable businesses addressing the needs of a previouslyP underserved client base. In addition, predatory lending can and does occur outside of the subprime market. But with an ample supply of funding from the secondary market and with high demand for home ownership, many subprime lenders targeted an ever-larger share of the home loan market. The industry grew rapidly and unsustainably, without the opportunity for adequate staff training or infrastructure development.
Sophisticated technology increased the distance between lenders and their clients. In many instances, the result was a culture tolerating, perhaps even engendering, abusive policies toward borrowers.
Predatory lending became an industry buzzword, and a regulatory target. While there is no universally-accepted definition of predatory lending, the following is a useful guideline: Any of a number of fraudulent, deceptive or unfavorable lending practices. Many of these practices are illegal, while others are legal but not in the best interest of the borrowers. Predatory lending is frequently associated with the following: Poor analysis of borrowers ability to repay, Aggressive marketing of high-risk, high-interest loans, Promotion of complicated loan products not easily understood by borrowers, Collection of undisclosed charges and expensive fees and Payment of illegal kickbacks.
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In 2006 and 2007, the market began to feel the pinch of predatory lending (especially in the financially vulnerable subprime market) and the trend toward relaxed underwriting standards. Investors noticed increasing loan defaults, particularly in the vintage 2005 and 2006 loan pools. Many of the defaulting loans were underwritten with no income
verification and had reached their first payment adjustment date with borrowers now unable to afford the required monthly payments.
Today, borrowers who took on these high-risk loans are losing their homes through foreclosure; lenders are acquiring properties worth a fraction of the amount owed to them; loan servicers cannot manage the sheer volume of defaults and investors have seen the depreciation of their portfolios.
The subprime lending market was a viable business model, with the potential to benefit society by extending financial services to the broader community. Had the emphasis been on sustainable growth, balancing the interests of all stakeholders (borrowers, lenders, other third party businesses and investors), the outcome may have been different.
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Commercial Microfinance - Avoiding The Pitfalls

Commercial Microfinance
Commercial microfinance is not synonymous with subprime lending. Notably, microfinance loans do not rely on the value of underlying collateral and thus are not at risk from real estate bubbles. However, microfinance is a nascent, high-growth industry with several commonalities with the early stages of the subprime lending industry.
CharacteristicsMicrofinance Shares with the Subprime Market

a. Expansion of financial services to the underserved to provide business opportunities for investors and access to funding for clients. b. Influx of available funding to the markets to enable rapid growth of business, in some cases from overanxious, inexperienced lenders. c. Prevalence of high interest rates to offset the increased risk in subprime markets and to cover operating expenses in microfinance markets d. Appearance of innovative new products to facilitate market penetration, broadly
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adopted in spite of limited data on effectiveness e. Increased reliance on technology to facilitate rapid growth, while distancing borrowers from lenders
Recommendations For Investors And Others

Microfinance investors, lenders and borrowers must exercise caution if commercial microfinance is to grow in a profitable and sustainable manner. All parties should recognize when microfinance institutions become careless as they seek to deploy available funding. Investors should insist on thorough due diligence of microfinance institutions. The wrong answers to the following questions may suggest a trend toward predatory lending: Compare average yield to net income. Is the interest rate higher than average for the region? If so, why? Are operating expenses reasonable? Are returns to investors higher than average? The interests of borrowers and investors should be in balance. Examine a sample of delinquent loans (across different loan products). How was borrowers ability to pay / indebtedness determined and documented? What steps were taken to collect on delinquent loans? What fees, if any, were charged? How were disputes handled? The process from underwriting through default management should make sense to the ordinary person. Review the new loan products offered. Do borrowers have multiple loans? Are underwriting standards appropriate? Are delinquency rates satisfactory for these new products? Each product should be suitable from a business perspective, for the particular microfinance institution. Request a schedule of fees (charged at underwriting and on collections). Are fees higher than industry / regional average? Are fees reasonable? Are fees clearly disclosed on loan
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applications? Fees charged should not be excessive; borrowers should understand the terms of their loans. Evaluate character. Is the stated mission of the organization reflected in the on-site culture? Are senior management, board members and staff members forthright and responsive to questions? Is compensation adequate and considered fair? The most effective lenders respect both their staff and their clients.
Overall, investors and microfinance institutions should monitor these issues as part of their standard business practices. Lenders should remain close enough to the borrowers to understand their interests and thereby to grow their own businesses successfully. Commercial microfinance stands at the threshold of the capital markets. The availability of abundant funding is fueling rapid growth. Now is the time to learn from the mistakes made in the subprime market where overabundant funding and irrational growth led to disaster for all stakeholders.
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CHAPTER 7: MICROFINANCE TECHNOLOGY:

Microbanking organizations, especially Microfinance institutions (MFIs),are now concentrating on adopting innovative solutions to optimize efficiency. The focus is on establishing a formal and efficient structure to record complex transactions and take intelligent business decisions. Use of smart cards, mobile phones, computers etc are helping the industry to carry out transactions in an effective and efficient manner.
GRADITM: Gradatim is a pioneer in providing comprehensive technology enabled solutions and services to the Microfinance industry. Gradatim offers BPU services across different areas in microbanking with specialized focus on micro finance, insurance, pensions, payments and commodity trading. Our plug and play, modular approach is aimed at developing clientresponsive, flexible financial services for MFIs by leveraging economies of scale.
Innovative Technology Platform
Gradatim recognized the importance of technology in facilitating effective functioning of MFIs early on. We have developed a technology solution, we call MFResolve to scale up MFIs with minimum infrastructure.
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Gradatims technology platform, MFResolve, is on-demand and modular and is based on pay as you use functionality. The hosted technology platform is built on principles of Service Oriented Architecture (SOA), and is designed to meet the requirements of the Microfinance industry in a cost-effective manner. The platform is beneficial as clients can leverage the benefits of technology without bearing the cost of setting up a sophisticated IT infrastructure.
MFResolve: Global Solution for Microfinance
Features of MF Resolve
Infrastructure, Hardware, Solution and High End Platform Hosted and Provided by Gradatim
Technology is fully web enabled and can be accessed by MFI Clients through a Secure Environment
Gradatim provides External Services that can be used by MFI Clients Platform is in-built with multiple Delivery channels for Customer Relationship Management Technology Updates and Maintenance completely managed by Gradatims highly skilled IT Personnel
Plug-In, Plug-Out Model. Very small Time to Deploy. Customizable
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Benefits of MF Resolve

Minimizing Capital Investment on IT Infrastructure for MFI Clients Strong Technology Framework for handling large volume of business covering beneficiaries in remote locations
Complete control of Data Inputs and Report Management Enabling Branch Banking, Rural Banking and Door Step Banking with one single Technology Platform
Real Cost Savings Real Time Interface with Bank / MFI Clients existing IT framework Emphasis on Maintaining Customer Data across all Business Processes
Gradatims services are backed by a team of highly skilled and resourceful team with over ten decades of hands on experience in Microfinance, rural banking, and priority sector lending
Gradatim delivers value by:

Enabling scale and creating news business opportunities Reducing operational overhead Handling regulatory and reporting requirements with ease Creating a more flexible business model Leveraging the benefits of automation Rationalizing costs and improving efficiency
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BEAM: Beam is a micro payment service aimed at the non-banked rural population of India. Beam distributes pre-paid vouchers that one can purchase in the denomination of Rs. 100-1000 and load their account, against the mobile number, through IVRS or SMS. Once the account is loaded you can use the service to pay utility bills, shopping, travel etc.
One does not need any bank account to use the service.The service can be positioned as a payment collection service for online shopping. You can shop/book tickets on their site and then use your Beam account to pay for the service. The company will be distributing the vouchers through franchisees called Beam Sahayaks. In future they will also distribute micro-finance to the rural audience.
PANWALA SELLING VOUCHERS.
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CHAPTER 8: CASE STUDIES

Case 1: India
India is a country with a very large untapped demand for microfinance. The growth percentage has been over 50%, with returns varying significantly. SKS has taken over the market leader position from SHARE. In the period of observation, the market was heavily influenced by the so called Krishna district collector incident in March 2006. In Andhra Pradesh, which had been the model state for microcredit in India, the collector of the Krishna district accused several MFIs of charging unfairly high interest rates, taking illegal collateral and using dubious methods of loan recovery. Although no formal interest cap exists in India, various sector players lowered their rates in response to this incident, as is reflected in the financial revenue numbers. Since then the central government - in particular Finance Minister P Chidambaram - has taken a positive stance towards the sector, and gradually more regulation has been introduced. The Indian market may therefore be currently characterized as having significant expansion possibilities, low interest rates due to informal interest ceilings and a credit-only market (where savings are not allowed). It is, however, open to foreign investors and - due to the fact that this is the largest single market in the world - a lot of innovation and investment has taken place in the last few years.
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Social Impact Whenever you are in doubt Recall the face of the poorest and weakest man whom you may have seen, and ask yourself if the step you contemplate is going to be of any use to him. Will he gain anything from it? Will it restore him to a control over his life and destiny? True development puts those first that society puts last. Mahatma Gandhi (as quoted by the Microcredit Summit Campaign) It is the social aspect of microfinance that first draws many people to the sector the use of capital for a greater good. Indeed, microfinance is the one form of socially responsible investment that has a direct impact on the lives of poor people the world over.
Microfinance institutions in some of the world's poorest countries have an established track record of alleviating poverty and developing entrepreneurs among the poor. Now that commercial microfinance is emerging as an investment opportunity for those with available capital, its important to remember and quantify the social return on investment as well as the financial return on investment.
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Social Returns : A Key Goal Of Commercial Microfinance
Many of the people now behind the movement for commercial microfinance have experience in more traditional forms of development aid. After working for donor organizations or multinational bureaucracies, some have come to believe that true development must be sustainable and that development goal is better served through investment than donations. Microfinance is unique among development interventions: it can deliver these social benefits on an ongoing, permanent basis and on a large scale, says a recent Focus Note from the World Banks Consultative Group to Assist the Poor (CGAP). Many well-managed microfinance institutions throughout the world provide financial services in a sustainable way, free of donor support. Microfinance thus offers the potential for a self-propelling cycle of sustainability and massive growth, while providing a powerful impact on the lives of the poor, even the extremely poor.
Microfinance is now such a key part of the strategy of multinational organizations that the United Nations has declared 2005 the International Year of MicroCredit. And microfinance plays a key role in the U.N. Millennium Development Goals, which include the eradication of poverty. UN Secretary-General Kofi Annan said: Sustainable access to microfinance helps alleviate poverty by generating income, creating jobs, allowing children to go to school, enabling families to obtain health care, and empowering people to make the choices that best serve their needs. The stark reality is that most poor people in the world still lack access to sustainable financial services, whether it is savings, credit or insurance. The great challenge before us is to address the constraints that exclude people from full participation in the financial sector.
Despite the widespread acceptance of microfinance by aid agencies and others, there is a basic cultural difference between donors and investors when it comes to money spent on development. Still, much of what attracts donors to microfinance is also what will attract
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investors a proven ability to provide social returns, efficient use of capital and the hope that eventually the microfinance institution will be able to stand on its own. Reaching a point where they can pay off investors and continue operating with the need for outside capital only for growth rather than for operating expenses remains a key goal for many MFIs. In the donor world, they refer to that kind of end-user of money as sustainable. In the investors world, its simply good profitable business.There will continue to be a supply, and a demand, of grant and donor money for microfinance.But that pool of money is not large enough to meet the growth needs of the sector.
The Role Of Socially Responsible Investors Social impact has always been a goal for some investors, and religious groups, unions and others have long sought to make their investments match their beliefs. But the world of socially responsible investing, or SRI, really got a boost in the 1980s when a stockbroker named Amy Domini realized many of her clients wanted more control over where their money went. By the end of the decade, Domini and two partners had formed their own firm and developed an index that could be used as a benchmark for SRI.
The movement got a further push from the corporate and market excesses of the 1990s. Scandals at Enron and other companies put more of a focus on how companies achieved their reported financial results, rather than just the results themselves or the stock price.
SRI is a growing investment industry. An estimated $2.16 trillion, or $1 out of every $9 in professionally managed accounts in the United States uses some kind of social criteria in
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investment decisions. SRI is growing about 15 percent a year or about 40 percent faster than the average of all professionally managed investments.
There are now numerous SRI funds, some of which are broad-based and attempt to track what is now known as the Domini 400 Social Index, others developed to invest from a particular religious or ethical belief. Many of the funds have developed what they call screens to be sure their investment money does not go to a company doing something counter to the funds beliefs for instance, tobacco companies, or weapons manufacturers.
But for all the positive influence that socially responsible investment funds have, in the end they are still simply investing money in large multinational corporations. Indeed, one of the shortcomings of many of the funds is they find it easier to weed out companies using so-called negative screens to avoid bad companies than to develop positive screens to develop a diversified portfolio of companies doing good things while also providing a solid financial return. Domini says it now makes investment choices for its funds with three basic tools social and environmental screens, shareholder advocacy (using shareholder status to push companies to do good), and community investing. It is in a variant of the third criteria that some SRI funds are beginning to look at microfinance. Microfinance is attractive to socially responsible investors because it meets the positive screen test. In other words, not only do MFIs not do bad, they have shown they can do much good and pay a return on investment. Microfinance receives only a tiny amount of the available SRI money, but the interest is growing.
Nonetheless, some SRI funds have investment criteria that prevent them from considering international or untested investments, and the long-term nature and limited liquidity of some microfinance investments can also hamper their ability to attract mainstream SRI funds. Still, SRI funds hold enormous potential as an eventual source of funds for commercial microfinance. Regardless, commercial microfinance is now surfacing as an asset class in and of itself, and is
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beginning to grow side by side with SRI funds and to slice off a market share of the investment dollars earmarked toward socially responsible investments, especially from institutional investors such as university endowments, charitable foundations and family trusts.
Measuring Social Impact
The blend of financial and social return on investment in microfinance is one of the key ways it will attract commercial capital. But it also presents difficulties namely how to measure the social return on investment. How does one first define the social benefits of an investment, and then quantify those results? Measures of financial benefits have become universal and standardized. Those for social benefits have not.
Microfinance investors have been joined by academic research groups and donor organizations in the search for the one metric that will be accepted as the gold standard for evaluating social return on investment. Some are trying to adapt business tools like the balanced scorecard and cost-benefit analysis to fit the world of microfinance. Others have developed various reporting standards or indexes. Until a single standard emerges, many organizations use proxy measurements to look at social impact, and often microfinance institutions and their backers turn to anecdotal evidence the words and pictures that tell such a compelling story of the benefits of microfinance to its clients. Damian von Stauffenberg of MicroRate, a pioneering rating agency for microfinance institutions, says often loan size especially loan size for returning clients can be used as a proxy for the social aspects of microfinance. That works in two ways first, smaller loans generally mean the institution is serving poorer clients, and second, a returning client repaying small loans and taking out slightly larger amounts often indicates the growing wealth of the client and the success of the program. In the high-quality MFIs evaluated by MicroRate, von Stauffenberg sees a high percentage of
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returning clients who have paid off earlier loans. He notes that MicroRate experts also look very closely at the MFIs loan evaluation process, and are especially wary of any consumer lending that is, money used to simply buy goods and not to develop self-sufficiency.
Until some accepted overall metric is developed that can show the social value created by microfinance institutions, many individual results are possible to see and quantify. They include number of jobs created and increases in individual or community income, relative to loans given. There are also harder-to-quantify long term benefits, including improvements in health care and number of children receiving education.
Kim Alter of Virtue Ventures noted at the 2003 annual meeting of the Small Enterprise Education and Promotion Network (SEEP) that financial sustainability measures are easier to set and quantify than social objectives, and business objectives can sometimes overwhelm social objectives. Alter also points out that people are simply not accustomed to measuring social impact in business terms, and often the funds and time are not set aside to measure social impact. Alter and many others who advise MFIs and those who provide the capital suggest that social impact objectives be set early so baseline measurements can be taken and time and financial budgets can be set to measure the changes. For the impossible-to-measure impacts, anecdotes can be a useful substitute for formal measurements.
Anecdotal evidence of the commercial and social success of microfinance is easy to find. The Calvert Foundation, which encourages socially responsible investing in the United States and around the world, cites the story of a woman named Byamma in southern India, who bought a milk cow with a loan of $111, paid it back and contributed $44 to family income with the sale of milk, and then returned for another $111 loan to invest in a sari business that buys in bulk and sells to village women on a weekly payment plan. The Calvert partner involved, Opportunity International, notes that while Byammas income continues to grow, she has also grown in selfesteem and now advises other women.
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But anecdotes only go so far. And they come with a warning you may have heard from an economics, statistics or logic professor at some point correlation does not prove causality. A village where an MFI is working may be more prosperous than another village without microfinance but that alone does not show the benefit of the microfinance institution. And the individual success stories can only take a potential investor so far. As Anton Simanowitz, the program manager for UK-based Imp-Act research group, points out: Impact assessment is more than just the monitoring of performance outcomes. There are broader and longer term questions relating to the direct and indirect impacts of microfinance services on clients and non-clients, their communities and the local and national economies of the countries in which they live.
The pioneering MFI Grameen Bank in Bangladesh has a list of 10 indicators as proxies for the client benefits from microfinance. They are: having a house with a tin roof beds for all members of the family access to safe drinking water access to a sanitary latrine all school-age children attending school sufficient warm clothing for winter mosquito nets home vegetable garden no food shortages even during the most difficult time of a difficult year sufficient earning opportunities for all adult members of the family
Private Vs. Public Funds
The core reasons for the success of microfinance in alleviating poverty, boosting economic development and developing entrepreneurs is twofold:
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1. By requiring that the money be paid back, it creates a system of empowerment and selfreliance that has a sustainable and contagious impact, and which direct aid has failed to produce time after time.
2. It brings loan recipients into the formal financial sector. These same two reasons are also at the core of why commercial microfinance profit-driven loans from private sources can be more successful at achieving social objectives than money from public, taxpayer sources. To draw a correlation on a more macroeconomic level of global finance, it has long been argued that the use of public funds from the likes of the World Bank and International Monetary Fund to bail out ailing governments in the developing world is counterproductive, because by acting as a lender of last resort, the multinational institutions are creating an atmosphere that encourages moratoriums on debt payments and sometimes outright default of loan principal and interest.
The same thing can happen in microfinance. MFIs that are supported by public monies have less of an incentive to be vigilant about paying back the loans, as they know that in the end the lender of last resort be in the World Bank or a local aid institution will absorb any non-performing loans. Consequently, those publicly funded lenders also have a tendency to be less vigilant about selecting profitable MFIs and monitoring their progress. Often, the attitude is if one MFI doesnt work out, they can always move on to another.
Commercially funded microfinance, on the other hand, has built-in efficiencies along the value chain. Because investors expect to be paid back, commercially backed microfinance funds pay close scrutiny to the MFIs they select to receive loans, and monitor them more closely. And that profit-driven attitude is translated to the MFIs when they select clients for loans and monitor loan repayment schedules. Finally, the loan recipients themselves are empowered with a sense of responsibility and obligation for repaying the loans. Add to that the added responsibilities that peer-lending groups imply, and the incentives for loan repayment can be quite strong.
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As a result, making efficient use of that capital becomes paramount. And that has a direct result on raising the financial and social level of both the loan recipient, those around him or her, and the community at large.
Also, there are indications that the best-run, most profitable MFIs are more efficient about introducing additional financial products into the community from mortgages and home equity loans to savings and checking accounts, insurance and even credit cards. All of this brings people who were once below the poverty line into the formal financial sector, and can go a long way toward poverty alleviation and economic development.
Conclusion: The Triple Bottom Line
A study by Barbara MkNelly and Chris Dunford for the organization Freedom from Hunger found that MFI clients in Ghana increased their incomes by $36, compared to $18 for nonclients. An assessment by BRAC in Bangladesh found that clients who stayed in the program for four years increased assets by 112 percent, and spent 28 percent more on family well-being. Those figures may not mean much to someone living in the West. But to the poor in Ghana and Bangladesh, it is a huge social impact. Study after study has shown similar results. As CGAPs focus note concludes: No single intervention can defeat poverty. Poor people need employment, schooling, and health care Access to financial services forms a fundamental basis on which many of the other essential
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interventions depend. Financial services thus reduce poverty and its affects in multiple, concrete ways. And the beauty of microfinance is that, as programs approach financial sustainability, they can reach far beyond the limits of scarce donor resources. The New York Times recently went along on a visit to MFIs in India and Bangladesh by Vinod Khosla, a partner at the Silicon Valley venture capital firm Kleiner Perkins. He said he was completely blown away by the stories of the women the MFIs were helping, and he pledged to spend both his time and money supporting microcredit initiatives. Khosla calls microfinance one of the most important economic phenomenon in the world in the last fifty years and he notes that in addition to providing amazing social impact, many of the programs he visited were highly profitable. The people impacted economically and socially through microfinance intervention go on to be more responsible citizens. They start being reactive and take care of not harming their environment.
The clear social impact combined with a reasonable expectation of a financial return provide the triple bottom line that is the story that will sell commercial microfinance in the capital markets. More work needs to be done on a standard measurement to quantify the social impact which may keep capital flowing slower than it otherwise would to the sector but in the long run its hard for investors who seek to do good to ignore the stories of thousands of small lenders and their millions of clients. THE THREE PILLARS
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Case 2: SKS MICROFINANCE

Introduction SKS Microfinance, promoted by Dr. Vikram Akula, was originally founded as Swayam Krishi Sangam or SKS Society in 1997 and functioned as a non-governmental organization (NGO) that provided microfinance in Andhra Pradesh. SKS Society transferred its business and operations to SKS Microfinance as a newly incorporated private limited company in India in 2003. SKS Microfinance is the largest Microfinance Institution (MFI) in India in terms of total value of loans outstanding, number of borrowers (called members) and number of branches. SKS Microfinance is a non-deposit taking non-banking finance company (NBFC-ND), registered with and regulated by the Reserve Bank of India (RBI). It is engaged in providing microfinance services to individuals from poor segments of rural India. Core Business The company's core business is providing small loans exclusively to poor women predominantly located in rural areas in India. These loans are provided to such members essentially for use in their small businesses or other income generating activities and not for personal consumption. Types of Loans Borrowers take loans for a range of income-generating activities, including livestock, agriculture, trade (such as vegetable vending), production (from basket weaving to pottery) and new age business (photography to beauty parlours). SKS also provides members with interest-free loans for emergencies as well as life insurance and loan cover insurance to borrowers.
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Business Model The Company utilizes a village centred, group lending model to provide unsecured loans to its members. This model ensures credit discipline through mutual support and peer pressure within the group to ensure that individual members are prudent in conducting their financial affairs and are prompt in repaying their loans. Failure by an individual member to make timely loan payments will prevent other group members from being able to borrow from it in the future; therefore the group typically make the payment on behalf of a defaulting member or, in the case of wilful default, use peer pressure to encourage the delinquent member to make timely payments, effectively providing an informal joint guarantee on the member's loan. Distribution Channel The company also uses its distribution channel to provide other services and goods that it founds that its members need. For instance, it also distributes and administers life insurance policy products for its members and has pilot programs to provide loans to its members to purchase select consumer products that increase their productivity.
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Operational Statistics The operational statistics of SKS are nothing short of phenomenal. SKS has recorded a growth of around 200% ever since it has become a NBFC in 2003. The statistics below speak for themselves. Operational Information Total no. of Branches Total no. of Districts Total no. of Staff Total No. of Members (In Millions) Amount Disbursed 1,525 4,454 16,789 31,994 Mar 06 80 19 574 0.20 Mar 07 275 102 2,389 0.60 Mar 08 771 217 6,425 1.87 Sep 09 1,676 345 17,520 5.30
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(INR. In Millions)
Portfolio Outstanding (INR. In Millions)
921
2,756
10,506
32,080
Financial Statistcs Similar to the operational statistics of SKS, financial statistics of SKS too are outstanding. Their revenues and profits too have been shown to grow by leaps and bounds. Financial Information Incremental Debt (INR in Crores) Total Revenue (INR. In Crores) PAT (INR. In Crores)
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Mar 06 88
Mar 07 277
Mar 08 1,063
Sep 09 1,247
10
46
170
385
0.44
3.67
16.64
55.60
Total Assets (INR. In Crores) ROA ROE
98
332
1,083
3,643
0.48% 3.08%
1.00% 18.1%
2.51% 16.3%
4.09% 15.15%
Cost Structure SKS charges interest sufficient enough to cover its costs.
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Yet, SKS is among the ones which provide the lowest cost to the borrowers.
SKS Capital
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SKS has been a sector leader in sourcing capital. In July 2009, Bajaj Allianz made a strategic investment of $ 10 million(INR 50 crore) in SKS Microfinance which was the first-ever investment by an insurance company in an Indian microfinance institution. In November 2008 SKS raised equity worth $ 75 million(Rs 366 crore), the largest equity raised by an MFI in the world. The third round of equity worth Rs 147 crore was raised in January 2008. In March 2006, SKS closed its first round of equity investment; the largest microfinance investment in India to date - $ 3.2 million from some of the worlds leading microfinance investors, and then eclipsed this accomplishment with a second round equity investment of $11.5 million in March 2007. It leverages its equity to raise debt from public sector, private sector and multinational banks operating in India. This capital has helped the organisation scale up operations and reach out to millions of poor households across the length and breadth of India. To meet future capital requirements arising out of growth in business, SKS came out with an IPO in july-Aug. 2010, worth Rs.1653.97 crores. Strengths Huge gap in Microfinance demand and supply: According to the 2008 Inverting the Pyramid Report by Intellecap, an independent industry research firm, the total estimated demand for micro-credit in India was approximately Rs. 2,39,935 crore with estimated total loan disbursements at approximately Rs. 20,072 crore. As of March 31, 2010, the company had 2,029 branches in 19 states across India with no state accounting for more than 28.8% of its outstanding loan portfolio. Capital adequacy ratio as of March 2010 stands at comfortable 28.3% compared to the EBI mandated minimum of 12% as of March 2010 and 15% as of March 2011. Gross NPA and Net NPA are just 0.33% and 0.16% respectively at the end of FY'10.
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The company lends to micro enterprises who earn returns in the range of 29% to 246% mainly due to use of family labours, low infrastructure costs and no taxes or legal costs. This helps SKS Microfinance to charge higher interest rate from its customers. Weaknesses Currently there is no interest rate cap on the lending by the microfinance institutions. MFIs typically charge high interest rate to its customers ranging between 26% to as high as 31%. There is risk perception that regulator may pitch in and put a cap on interest rate charged and regulate the sector. As the costs and risks in this business are also high, any unreasonable cap will severely impair the business prospects. Microfinance as a business is still in the evolution stage. Due to the unsecured nature of advances and very low income earning capacity of the borrowers with little savings, the default risk in this business is high. Natural calamities like floods etc, political instability, social strife in certain areas can severely impair the borrowers' ability to pay and lead to mass defaults in particular areas/states. Due to the nature of operations, large amount of cash is handled with attendant risks of theft, fraud, misappropriation, violent crimes against its employees etc. Microfinance has been traditionally met through informal sources including non-government organizations, or NGOs; cooperatives; community-based development institutions like Self Help Groups, or SHGs, and credit unions. Better flow of funds to these institutions, or more involvement of banks in direct financing of small borrowers or government sponsored schemes for facilitating flow of funds at lower cost to the poor segments of the society can pose stiff competition to the company as it charges comparatively high interest rates.
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CHAPTER 9: BOTTLE NECKS IN MICROFINANCE

Traditionally, banks have not provided financial services, such as loans, to clients with little or no cash income. Banks incur substantial costs to manage a client account, regardless of how small the sums of money involved. For example, although the total gross revenue from delivering one hundred loans worth $1,000 each will not differ greatly from the revenue that results from delivering one loan of $100,000, it takes nearly a hundred times as much work and cost to manage a hundred loans as it does to manage one. The fixed cost of processing loans of any size is considerable as assessment of potential borrowers, their repayment prospects and security; administration of outstanding loans, collecting from delinquent borrowers, etc., has to be done in all cases. There is a break-even point in providing loans or deposits below which banks lose money on each transaction they make. Poor people usually fall below that breakeven point. A similar equation resists efforts to deliver other financial services to poor people. Heavy dependence on banks & FIs MFIs are dependent on borrowings from banks & FIs. For most MFIs, funding sources are restricted to private banks & apex MFIs due to risks involved & as huge amounts of funds are required. Available bank funds are typically short-term (max. 2 years period) Also, there is a tendency among some lending banks to sanction and disburse loans to MFIs around the end of the accounting year in pursuit of their targets. This leads MFIs to draw and deploy the funds sub-optimally for a period, till they find better avenues for deployment in loans to the needy clients.
High Interest rates Reports tells us that SKS Micro-finance is charging approximately 24 per cent rate of interest in Orissa, Karnataka and Andhra Pradesh; in southern India, Equitas Micro-finance is seeking 2128 per cent interest rate and Basix Microfinance is providing small loans at 18-24 per cent
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interest rate. There are numerous other players, and they all rake in money. Sewa in Gujarat and the Grameen Bank in Bangladesh too thrive on a similarly high rate of interest. People went on borrowing from the money lenders or sahukars because they needed the money and it must have and still is making a difference to them otherwise the entire business of moneylending would have collapsed and become unsustainable. All that micro-finance institutions are doing now is to replace that class of moneylenders. Micro-finance institutions are also extracting their pound of flesh. The sahukars were using their own capital for lending and therefore charging a very high interest of 60 per cent or above. The micro-fianance use the bank finances and therefore charge a little less at 20-24 per cent.
Weak structure The majority of the MFIs are structured and registered as societies, cooperatives, trusts and notfor-profit companies. Companies account for just 22% of CRISIL's MFI grading assessments. The governance practices of these MFIs are to some extent comparable with the good governance practices of mainstream corporations. The legal structure and attendant regulatory requirements of an MFI have a strong bearing on governance practices because they influence management practices and the level of transparency. Other than a formal company structure, All other legal structures, such as trusts and societies, suffer from the lack of any meaningful regulation and disclosure standards. This also creates a virtuous cycle/vicious cycle phenomenon: MFIs that have the willingness and minimum capital funds to embrace a corporate structure as a nonbanking finance company can more easily attract outside investors, which in turn encourages better governance and disclosure standards. In contrast, MFIs that are either unable (for lack of adequate sponsor funding capacity) or unwilling to convert to a corporate structure tend to remain "closed" to transparency and improved governance standards, and therefore continue to be unable to attract outside capital.
Competition
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Poverty has literally become a big and organised business. There can be no better business opportunity than starting a micro-finance institution with assured returns and 100 per cent loan recovery. With high interest rates & proper resources it is easy to make huge profits. This has resulted in the huge amount of increase in the number of MFIs in India today. India's microfinance sector is fragmented, having more than 3,000 MFIs, NGO-MFIs present. Also commercial banks are slowly coming into the picture and many are partnering with regional microfinance institutions. Increasingly, loans as small as $100 are being made by mainstream Indian banks such as ICICI, HDFC, and UTI, and often contain unconventional covenants typical of microfinance transactions. Founded in 1977, HDFC had net income for 2005 of about $200 million and 24 rural partners. Recent partnerships include: Ujjivan, Bellwether microfinance fund, Avishkar-Goodwell Fund, Lok Capital, and Activists for Social Alternatives. Another example of a commercial bank that has partnered with local MFIs is ICICI, which has 72 such partnerships. ICICI Bank had net income in 2005 of about $500 million, and operates 614 branches and 2200 ATMs. Through about 100 rural partnerships, its portfolio of microfinance investments stood at $227 million and 1.2 million clients at year end 2005. A prominent partner of the bank is Spandana. The Andhra-Pradesh-based microfinance institution disbursed loans of $3.4 million in 2004 at an effective rate of 30%, of which 9.25% went to ICICI. In addition, in November 2005, ICICI tied up with the Grameen Foundation USA to create microfinance lender Grameen Capital India. ICICI has been micro lending since 2001. Mumbai-based UTI began in 1994, and is 72% publicly-owned. It had net income in 2005 of $104 million, and operates 450 branches and more than a thousand ATMs throughout India. In its Annual Report 2005-2006, reference is made to increasing microfinance activities by offering new services to rural clients. UTI works closely with the Grameen Koota program, which has outstanding loans of $3.2 million, as well as SKS Microfinance of India.
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CHAPTER 10: IMPACT

INSTANCES OF MICROFINANCE SUCCESS IN INDIA
MokshaYug Access (MYA) is employing innovative business models and its experience in large-scale infrastructure projects to expand the reach of microfinance throughout Karnataka. MYA aims to establish poverty-free villages by leveraging the financial resources and innovation of the private sector, the knowledge and commitment of non-governmental organizations, and the vast outreach of the public sector. Launched in 2006, MYA has expanded across Karnataka to reach the poorest communities and intends to reach 5.3 million rural poor by 2012. While MYAs mission is broad and looks to achieve poverty alleviation and access to financial services across India, the organization is currently focused on just three districts in Northern Karnataka MYA currently serves nearly 25,000 clients. It provides an array of services including savings, loans, and insurance services in rural areas of Karnataka. In addition to life and health insurance, MYA offers livestock and goat insurance to marginalized farmers, helping ensure they dont lose critical income should an animal become ill. MYA has also generated additional economic opportunity for local entrepreneurs, most recently working with Indias leading incense maker to aggregate and supply raw materials at lower rates increasing its clients profits by 60 percent. Additionally, MYA is building a comprehensive supply chain model and will franchise it throughout India to provide rural households with additional products and services. Swadhaar is a new microfinance institution (MFI) which operates primarily in the urban slums of Mumbai largely regarded as one of the most difficult areas to alleviate poverty. According to the 2001 Indian Census, 54.1% of Mumbais residents live in Mumbais slums, generally without even basic amenities such as running water or indoor plumbing.
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Until very recently, urban microfinance was thought to be impossible -- especially in Mumbai, regarded as one of the most complex markets due to its client base. We formed Swadhaar to bring opportunity and hope to the hardworking poor people of Mumbai trapped in poverty. A strategic partnership with Unitus and microfinance expertise from ACCION will move us much closer to our goal of providing financial services to 195,000 clients by 2011, says Urmee Mehta Mankar, Swadhaar . Swadhaar commenced operations in March 2006. In the next fiscal year (through March 2007), Swadhaar hopes to open two more branches. By the end of 2011, Swadhaar has the visionary plan of reaching 195,000 clients with access to microfinance services
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MICROFINANCE SECTOR GROWTH FOR 2009 IN INDIA
Microfinance is much more than micro credit, it includes Provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban and or urban areas for enabling them to raise their income levels and improve living standards.
The sector saw impressive growth in terms of client coverage and the outstanding portfolio of loans. During the year, clientele expanded by 9.9 million after eliminating the overlap between the clientele covered by self-help group-bank linkage programme (SBLP) and microfinance institutions (MFIs)taking the number of total clients to 54 million. The outstanding loan portfolio also grew by nearly Rs 2,500 crore. This is the first time that the narrowly defined microfinance clientele has crossed the 50 million mark,
With more than Rs. 1,000 crore capital inflows into the microfinance sector in 2009, new avenues to raise funds have come under scrutiny of microfinance institutions to meet the demand for rapid expansion that the sector is witnessing in the last two years despite the global financial meltdown in the mainstream banking sector.
Led by SKS microfinance and Spandana Sphoorthy which have successfully raised funds via the non-convertible debentures (NCD) route, many MFIs will follow the suit. The NCDs, which can be issued to both retail and institutional investors, will be in the form of a loan to a company that cannot be converted into equity. The countrys first ever listed MFIs non- convertible debentures issue was by Hyderabad-based SKS Microfinance that had raised Rs 75 crore by one year NCD at a coupon rate of 10 per cent in May 2009. The NCDs are listed on the Bombay Stock Exchange (BSE) and have been placed with the Standard Chartered Banks Foreign Institutional Investments (FII). The company chose to raise funds through NCDs (debt) so that it could match its debt with the equity it raised a year before.
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Similarly, in June, Spandana Sphoorty Financial Limited, another Hyderabad-based microfinance institution, had raised Rs 80 crore by issuing one-year non-convertible debentures (NCD) redeemable at a premium of 10 per cent. The NCDs have been subscribed by Standard Chartered Bank India and were listed on the Bombay Stock Exchange (BSE).
For investors, NCDs still remain good option given the Fixed Income scenario. Essentially, these NCDs are more attractive as the companies typically offer 2-4 per cent higher returns than the fixed deposits. Moreover, they attract no TDS on interest as they would be issued in a dematerialized form and listed as a security in the National Stock Exchange. They also allow flexible liquidity or a short-term tenor.
The CRILEX India Growth Index depicting the growth of microfinance institutions in India
The CRILEX India Performance Index is a composite index of the performance of microfinance institutions in India and uses information on portfolio at risk and return on assets of 14 MFIs Source: M-cril India, M-CRIL.COM
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Sa-Dhan Report Financial Performance of Indian MFIs - A Quick Review, 2010

Some Highlights
The Total Loan Outstanding for all 264 Microfinance Institutions that provided their Data to Sa-Dhan for the report is Rs.18, 343 crores.
The total number of active borrowers has grown by 46% and the outstanding loan portfolio has grown by 57.4% when compared to 2009. For profit Microfinance NBFCs hold nearly 90% of the total loan portfolio outstanding by MFIs.
The average loan size from the sample is Rs.9, 766. The total outstanding borrowings for MFIs as of 31st march, 2010 stands atRs.16, 466 Crores. Out of this 77% is held by the 10 largest MFIs , while 90% of the total borrowings are held by for profit Microfinance NBFCs.
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Conclusion
Microfinance and financial inclusion is the need of the hour in our country. To summarize their goals as follows; Eradicate Extreme Poverty & Hunger. An end to the mistreatment by money lenders. Achieve Universal Education. Promote Gender Equality & Womens Empowerment. Reduce Child Mortality. Combat Diseases. Developing Entrepreneurial Spirit. The increasing number of Microfinance institutions along with the aid of technology and regulations will soon help our country to move out of the poverty problem. I would like to conclude by this quote,
The poor themselves can create a poverty-free world. All we have to do is to free them from the chains that we have put around them - Muhammad Yunus
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Bibliography
http://en.wikipedia.org/wiki/Microfinance http://indiamicrofinance.com http://www.microfinanceinsights.com www.microfinancegateway.org www.economictimes.com http://ifmr.ac.in/cmf/mrap/wp-content/uploads/2009/03/the-microfinance-revolution.pdf www.scribd.com http://www.scribd.com/doc/20998565/Top-50-Microfinance-Institutions-in-India-by-CRISIL http://www.scribd.com/doc/92714/Microfinance http://www.microcapital.org/whitepapers http://www.articlesbase.com/loans-articles/status-of-different-micro-finance-models-in-india2302626.htm
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Microfinance An Overview

A PROJECT REPORT ON MICROFINANCE AN OVERVIEW

H.R COLLEGE OF COMMERCE AND ECONOMICS CHURCHGATE, MUMBAI-400020

SUBMITTED BY RADHIKA.S.ALREJA T.Y.B.M.S. (SEMESTER V)

PROJECT GUIDE PROF.NAVIN PUNJABI

SUBMITTED TO UNIVERSITY OF MUMBAI

ACADEMIC YEAR - 2010-2011

Signature of the Principal (DR.MRS INDU SHAHANI)

Signature of the project guide (PROF.NAVIN PUNJABI)

The information submitted is true and original to the best of my knowledge

Signature of the student RADHIKA.S.ALREJA

CHAPTER 1: RESEARCH METHODOLOGY

Objective of the Study:

THE CONCEPT OF MICROFINANCE

Understanding the History of Microfinance

Need for Microfinance

TOP MFIS CRISIL

Product offering: Micro credit, investments, insurance, saving, etc.

Legal structure: Cooperatives, NBFC, unregistered, societies, trusts, for-profit, non-profit.

The Grameen Bank Model

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

CHAPTER 3: HOW MICROFINANCE EMPOWERS POOR

Thus the role of micro financing in India can be summarized as follows:

WOMEN AND MICROFINANCE

Whats Wrong With The Regulations We Already Have?

Elements Of Microfinance Regulation:

reports and board meeting minutes.

Microfinance Regulation In India

CHAPTER 5: The Role Of Microfinance Rating Agencies

CHAPTER 6: SUBPRIME LENDING: LESSONS FOR THE MICROFINANCE INDUSTRY

Subprime Loans And Predatory Lending

Commercial Microfinance - Avoiding The Pitfalls

CharacteristicsMicrofinance Shares with the Subprime Market

Recommendations For Investors And Others

CHAPTER 7: MICROFINANCE TECHNOLOGY:

Innovative Technology Platform

MFResolve: Global Solution for Microfinance

Plug-In, Plug-Out Model. Very small Time to Deploy. Customizable

Gradatim delivers value by:

PANWALA SELLING VOUCHERS.

CHAPTER 8: CASE STUDIES

Social Returns : A Key Goal Of Commercial Microfinance

Measuring Social Impact

Private Vs. Public Funds

Conclusion: The Triple Bottom Line

Case 2: SKS MICROFINANCE

Portfolio Outstanding (INR. In Millions)

Total Assets (INR. In Crores) ROA ROE

CHAPTER 9: BOTTLE NECKS IN MICROFINANCE

CHAPTER 10: IMPACT

MICROFINANCE SECTOR GROWTH FOR 2009 IN INDIA

Sa-Dhan Report Financial Performance of Indian MFIs - A Quick Review, 2010

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