Project On,

Micro Finance
Submitted by-

Devendrakant Sahu- 31 Dhaval Desai- 33 Dhriti Sach Dev- 35 Dipali Parikh- 37 Falak Kothari- 39
( eMBA div- A )

Under the guidance of:

Prof. P.A. Jhonson

MET Asian Managenment Devlopmeent Centre Institute Of Mangement

Microfinance: Philanthropy Through Industry

What is microfinance?
The term "microfinance" describes the range of financial products (such as microloans, micro savings and micro-insurance products) that microfinance institutions (MFIs) offer to their clients. Microfinance began in the 1970s when social entrepreneurs began lending money on a large scale to the working poor. One individual who gained worldwide recognition for his work in microfinance is professor Muhammad Yunus who, with Grameen Bank, won the 2006 Nobel Peace Prize. Yunas and Grameen Bank demonstrated that the poor have the ability to pull themselves out of poverty. Yunus also demonstrated that loans made to the working poor, if properly structured, had very high repayment rates. His work caught the attention of both social engineers and profit-seeking investors. Historically, the goal of microfinance was the alleviation of poverty. For many years, microfinance had this primary social objective and so traditional MFIs consisted only of non-governmental organizations (NGO), specialized microfinance banks and public sector banks. More recently, the marketplace has been evolving. For example, some non-profit MFIs are transforming themselves into profit-seeking institutions to achieve greater strength, sustainability and market reach. They are being joined in the microfinance marketplace by consumer finance companies, like GE Finance and Citi Finance. "Big-box" consumer retailers, like Wal-Mart, Elektra and Tesco are beginning to emerge as consumer lenders and a few are venturing into microfinance.

Although most MFIs still consider poverty alleviation the primary goal, selling more products to more consumers is the primary motivation of many new entrants.

Microfinance Products and Services

The following products and services are currently being offered by MFIs:

Microloans:
Microloans (also known as microcredit) are loans that have a small value; most loans are less than $100 in size. These loans are generally issued to finance entrepreneurs who run micro-enterprises in developing countries. Examples of micro-enterprises include basket-making, sewing, street vending and raising poultry. The average global interest rate charged on micro-loans is about 35%. Although this may sound high, it is much lower than other available alternatives (such as informal local money lenders). Moreover, MFIs must charge

interest rates that cover the higher costs associated with processing the laborintensive micro-loan transactions.

Microsavings:
Microsavings accounts allow individuals to store small amounts of money for future use without minimum balance requirements. Like traditional savings accounts in developed nations, micro-savings accounts are tapped by the saver for life needs such as weddings, funerals and old-age supplementary income.

Micro-Insurance:
Individuals living in developing nations have more risks and uncertainties in their lives. For example, there is more direct exposure to natural disasters, such as mudslides, and more health-related risks, such as communicable diseases. Micro-insurance, like its non-micro counterpart, pools risks and helps provide risk management. But unlike its traditional counterpart, micro-insurance allows for insurance policies that have very small premiums and policy amounts. Examples of micro-insurance policies include crop insurance and policies that cover outstanding balances of micro-loans in the event a borrower dies. Due to the high administrative expense ratios, micro-insurance is most efficient for MFIs when premiums are collected together with microloan repayments.

 What does microfinance mean for you?

The development and growth of the microfinance market affects more than just those who are engaging in or contemplating microfinance services. Here it is how it may affect you:

As an investor:
Return-focused institutional investors are now making microfinance-related investments. In addition, major ratings agencies are rating microfinance transactions. For example, Morgan Stanley issued a microfinance backed bond, which contained tranches and was rated "AA" by S&P. This shows that microfinance is beginning to provide investment opportunities for all investors. The Micro Banking Bulletin reports that 63 of the world's top MFIs have an average return of about 2.5% of total assets. Local and regional banks are generally the first to integrate microfinance investments into their portfolios,

while large international banks currently prefer to provide financing to other banks, MFIs or NGOs.

As a finance professional:
Microfinance requires highly specialized financial knowledge as well as a unique combination of skills, such as knowledge of social science, local languages and customs. New careers are emerging to fit these unique demands. For finance professionals, this means that new careers are opening up for those who have this unique combinations of skills and experiences. Moreover, traditional career roles are blurring as microfinance brings together professionals with varied backgrounds to work in collaborative teams. For example, development professionals can now be found working side by side with venture capitalists. A wide range of microfinance career opportunities can be found at Microfinance Gateway.

As an individual:
Some believe that we are living in a time when poverty may be eradicated. Studies support that belief. According to the Virtual Library on Microcredit, during an eight-year period, among the poorest in Bangladesh with no credit service of any type, only 4% pulled themselves above the poverty line. But with individuals and families with microcredit from an MFI, more than 48% rose above the poverty line. What poverty eradication means to you as an individual depends largely upon your personal philosophy. You might welcome it as a key achievement in the history of humanity. You also might celebrate the possibility that we each can all buy and sell to one another. Individuals who seek to be a part of this poverty eradication phenomenon may now loan money to a microentrepreneur in another part of the world through the non-profit online service Kiva.

 HOW IT WORKS
According to the International Fund for Agricultural Development (IFAD), a specialized agency of the United Nations, 65 of the world's top microfinance issuers got an average rate of return of 2.5% of total assets, which is comparably to returns in the commercial banking sector. So how do these organizations get people with virtually no personal assets to make good on loans? Many microfinance proprietors look to educate the destitute groups they serve about how basic banking services work. In many instances, people looking to join microfinance organizations are first required to take a basic money management class. Lessons focus on ways to develop savings, debt management, how banks work, how to budget and how to manage cash flow. Once educated on how the process works, customers are then allowed access to loans. Just as one would find at a traditional bank, a loan officer approves and helps borrowers with loan applications and oversight. The typical loan - usually $100 or less -does not seem like much too many in the developed world, but to people trapped in rural poverty, this figure is enough to start a business or engage in other profitable activities. In most cases, many potential borrowers cannot offer any collateral. As a buffer, microlending operations often pool people seeking loans together. After receiving loans, recipients repay their debts together. Because the success of the program depends on everyone's contributions, a form of peer pressure exists to help ensure loan repayment. For example, if an individual is having trouble using his or her money to start a business, that person can seek help from other group members or from the loan officer. Through repayment, loan recipients start to develop credit, allowing them to obtain larger loans down the line. Also, many microfinance operations require loan recipients to set aside parts of their income

toward a savings account used as insurance in case of a loan default. Others also require borrowers to allocate a portion of their income to a personal savings account for you at a later date.

ROLE OF MICROFINANCE
In a world where almost half the population lives on less than $2.50 a day, microfinance is one of the better tool for poverty alleviation, economic growth and development in emerging economies. Loans offer the same benefits to major world economies that face growth problems.

Microfinance Role in Economic Growth

Having said that, one must realize microfinance is not impervious to impact of the global financial crisis. Instead, we realize that loans can help lower-income groups setup and grow the small businesses, which generate income and employment that helps their communities and their economies. Poor people do not want to stay poor. Like everyone else, they wish to put an end to their economic hardship and exploitation by either working or exploring selfemployment. In the latter case, money can be raised through friends and family, gathered over time through savings, or obtained through loans fron microfinance insitutions. You can read about this in detail at theRadical Frontiers Blog.

Naturally, small business owners are not afraid of failure and their resilience, grit and determination has helped them march through the current economic recession, marked by a collapse of debt instruments. Bear in mind that all these are common characteristics of entrepreneurs. Having said that, many micro ventures do not produce the inflated results we expect of them and some studies show microfinance is not all that it promises to be. This may be because of high interest rates on these loans, or other problems faced by microfinance, or even because of a shortage of tools to measure the social impact of microfinance.

ROLE OF MICROFINANCE FOR PROMOTING INTEGRATED RURAL DEVELOPMENT AND POVERTY ALLEVIATION
The concept and role of micro financing is well known for social upliftment as well as for the development of rural and backward areas. Considerable efforts are being made at the public and private sectors to bring in enough number of technologies in the rural areas for their implementation and use through micro financing for the overall development. However, support of micro financing agencies including banks is not reaching at the grass route levels and therefore, most of the developmental programmes get diluted or ineffective and many a times they don't even take off. In the rural areas people are not much aware about the micro financial schemes and their benefits. Hence, in order to provide sustainable rural development and progressive poverty alleviation the role of micro financing agencies becomes an important in the context of current scenario. In the present communication the whole mechanism of micro finance, its role to achieve sustainable rural development. All over the world the role of micro financing for rural development and alleviating poverty is well known and in many a cases it has

been proved that well organized micro financing policies have helped in achieving sustainable development of the rural sector. During 11th five year plan Government of India also emphasized development of the rural sector through poverty alleviation and achieves more than 8% economic growth. For this purpose appropriate financial budget allocation has also been announced. For achieving this goal, both public and private sectors have to play important role in macro and micro financing. Many underdeveloped countries like Afghanistan, Tajikistan, Sierra Leone, Bosnia and Herzegovina have emphasized how micro financing stimulates growth and development of the rural section in their respective countries (from internet). In India more than 70% of the population lives in villages and most of these villages are underdeveloped. Research and development sector in our country brings number of green and eco-friendly technologies every year. Implementation of these technologies in the rural sector can bring radical change in the rural economy which may also lead to poverty alleviation, create employment opportunities and generate or stimulate good growth. However, for implementing these technologies micro financing through public and private sector agencies is the need of the hour. In the present paper efforts have been made to critically analyze all the issues focusing how micro financing can bring mutational changes in the rural economy for overall benefits to all the communities and weaker sections of the society.

Green technology for rural development

The green technologies are those technologies which are eco-friendly. In other words, the technologies developed by using natural resources and when adopted will not create any nuisance to the environment. In India there are number of R & D scientific organizations like Council of Scientific and Industrial Research (CSIR), Indian Council of Agricultural Research (ICAR), Indian Council of Medical Research (ICMR), Indian Institute of Technology (IIT), Conventional Universities, Agricultural Universities, Baba Atomic Research Centre (BARC) and number of private industrial research agencies are contributing in evolving one or other technology which is rather eco-friendly and can be defined as green

technology. Depending on the necessity and challenges that are required for the overall development of the rural sector we need to bring in and implement at least some of the green technologies in such locations. For this purpose micro financing is very much needed for applications of green technologies. Integration of micro financing and technological application will definitely stimulate growth and overall development of the rural sector. Today we have number of green technologies namely renewable energy from wind, water, tidal energy, solar energy, development of bio-fuels from natural resources, bio-gas plants, bio-fertilizers, bio-manures, bio-pesticides, bio-waste recycling, bio-conservation, cattle farming and aquaculture, dairy and dairy products, pollution control and water purification, water conservation, rejuvenation for plantation and development of forest etc. After witnessing a dip in 2009 on account of global financial crisis, the green sector in India is once again attracting the attention of investors and banks. Three reasons have been thought of which are favorable for investors in rural sector i.e.high REO's (returns on equity), increasing investor comfort with renewable generation risk, and strong commitment from the central government to ensure renewable feasibility. The growth of the green sector is substantiated by pace of lending support financially through banks for implementing green technology projects. Recently Yes bank and State Bank of India have set aside certain percentage allocation of funds to implement projects related to clean technologies. For example Yes Bank has offered Rs 700 crores for a project involving management of municipal solid waste and its disposal in an environmentally friendly manner. State Bank of India has tied up with Managing Emission, a Mumbai-based company involved in business of setting up projects for renewable energy and energy efficiency with carbon embedded assets, to provide 20, 000 energy efficient plants to rural India through micro finance loans. The project involves building bio-gas plants at farmers houses. The project aims at reducing greenhouse emission by saving conventional fuel such as fire wood, LPG and kerosene.Under the project, farmers contribute 50% of the cost and the balance 50% is financed through low interest micro finance loans from the bank. The repayment of the micro finance loan is then structured in a manner by which the income received from carbon credits is used for repayment.

Information, awareness and technology selection

Though number of green technologies is available, all these cannot be implemented each and every where. Depending upon resources available and geographical and climatic condition, location specific technologies we need to bring in and implemented. In such efforts we may have to critically examine location specific technologies and their feasibility for implementation. To familiarize about the technologies and develop skill there is again need for training

and awareness. For this purpose regular training programmes have to be organized through various agencies and create a kind of awareness and develop expertise. This kind of exercise is very much needed for successful implementation of technological applications. Micro financing including lending and repayment rules and its awareness should be the part of such training programmes.

Micro finance for technology applications

Microfinance is defined as provisions of thrift, credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve living standard. Microfinance is provided in varying context either to individuals or groups ranging from personal micro credit to small enterprise support and rural finance.

 MICROFINANCE INSTITUTIONS IN INDIA

Currently, roughly 66% of the micro finance supply is via the Self Help Group (SHG)-bank linkage route. However, MFIs grow faster now, in terms of number of clients and credit flow. The share of MFIs is rapidly growing. There are about 800 MFIs in India (NABARD). However the top 15 MFIs account for about 70% of the credit through MFIs.

SKS MFI India

Indias largest and one of the fastest growing microfinance organizations. Branches : 2407

Current Outreach: Members: 78 lakhs

Amount Disbursed: INR- 19841 crore ( USD 4421 million) Loan amt: Rs. 20,00-100,000 . Commercial Banks lend money to SKS at 11- 14% interest to borrow funds. Interest rates in the sates of Andhra Pradesh, Karnataka and Orissa at 26.7%. Other states in India at 31.4%.

The only MFI in India to be listed on the stock Exchange.

Loan amt for poor women : Rs. 2000 12,000

 MICROFINANCE REGULATIONS AND POLICY

The government is likely to introduce a Bill that seeks to make it mandatory for all micro-finance institutions to be registered with the Reserve Bank of India and entrusts the task of regulating the sector to the central bank in the Winter Session of Parliament.The Finance Ministry is in discussion with all concerned stakeholders for fine-tuning the draft Micro Financial Sector (Development and Regulation) Bill, 2011, official sources said.The ministry hopes to table the Bill in the upcoming Winter Session of Parliament, sources said. The draft Micro Financial Sector (Development and Regulation) Bill, 2011, was circulated for public comments in July this year.In an earlier Bill, it was proposed that the National Bank for Agriculture and Rural Development (NABARD) would be the regulator of the sector.The government had introduced the Micro Financial Sector Bill in the Lok Sabha in March, 2007. However, the Bill lapsed when the term of the 14th Lok Sabha expired in 2009.The latest draft Bill proposes to make it mandatory for micro-finance institutions to be registered with the Reserve Bank and have minimum net-owned funds of Rs 5 lakh. In addition, a Micro Finance Development Council will be set up to advise the government on formulation of policies, schemes and other measures required in the interest of orderly growth and development of the sector and micro-finance institutions with a view to promote financial inclusion.The council will comprise members not below the rank of Executive Director from NABARD, National Housing Bank, RBI and SIDBI. In addition, joint secretaries from the Ministry of Finance and the Ministry of Rural Development will also be its members. The draft Bill also proposes that any micro-finance institution which is not a company registered under the Companies Act, 1956, and which becomes a systemically important micro-finance institution shall convert its institution into a company registered under the Companies Act, 1956, with or without a licence, under Section 25 of the Act.This should happen within six months from the date of the balance sheet that shows the MFI has become a systematically important micro-finance institution in terms of the rules prescribed by the central government, the draft Bill said.

The RBI may pass an order directing a micro-finance institution to cease and desist from carrying out micro-financing if it is found acting in manner prejudicial to the interest of its clients or depositors.The Reserve Bank will cancel the certificate of registration granted to a micro-finance institution if it fails to comply with the directives or condition, the draft Bill states.

The microfinance crisis in Andhra Pradesh analysis of the AP Act

The Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Act, 2010 In October 2010, with no warning or consultation with stakeholders, the Government of Andhra Pradesh issued the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Act, 2010 effectively shutting down all private sector microfinance operations in the state. The AP Act does not however apply to APs government-backed microfinance business which directly competes with private sector MFIs. This was a major blow to the entire microfinance industry as Andhra Pradesh, widely regarded as the birthplace of private sector microfinance, accounts for over 40% of all loans by MFIs across India according to some estimates. To justify its extraordinary action against private sector microfinance, the AP government claimed to be protecting the poor from what they claimed to be rapacious lending practices by the MFIs. But, as discussed below, the facts prove otherwise. Moreover, by its own terms, the AP Act aims to protect the governments own microfinance programs which had been losing market share to the more efficient and better run MFIs: Whereas these SHGs are being exploited by private Micro Finance Institutions (MFIs) through usurious interest rates and coercive means of recovery resulting in their impoverishment & in some cases leading to suicides, it is expedient to make provisions for protecting the interests of the SHGs, by regulating the money lending transactions by the money lending MFIs and to achieve greater transparency in such transactions in the State of Andhra Pradesh. No-one would object to protecting the poor from exploitation by institutions charging usurious rates, practicing coercive recovery techniques, or driving clients to suicide. However, was there ever any real substance behind these alarming claims? Indeed, when one looks for evidence to substantiate these allegations, it quickly becomes apparent that the services being provided by private sector MFIs are valued by their clients, and are neither usurious nor violent. On the contrary, given the size of the MFI sector, tales of exploitation are remarkably rare.

 What is to be done?
Prior to the enactment of the AP Act prohibiting the normal operations of the private sector MFIs, repayment rates were over 98% and the industry was healthy and growing rapidly. The source of the current crisis is also the solution to the current crisis namely the repeal of the AP Act.

Urgently repeal the AP Act. Immediately supersede, suspend or repeal the AP Act, which is the source of thecrisis. The only way to address the extensive damage being done by the Acts effective prohibition against private sector MFI operations is to remove it. Removal would achieve the following goals: Allow MFIs to collect the amounts owed to them in AP Allow the MFIs to meet their commitments to lenders Avoid the wholesale destruction of several leading MFIs Avert a banking crisis and Aid the rural poor by ensuring that they retain access to microfinance services.

Removal would also redress the current balance of power issue, ensuring that regulation of those MFIs classified as NBFCs is returned to its rightful controller, namely the RBI. Consult with equity stakeholders to ensure the new regulations do no harm. The RBI and central government must take the time to do a full analysis with input from all stakeholders to ensure that the regulations ultimately introduced are beneficial and that any unintended consequences have been identified and fully considered. A cautionary tale regarding investment in India has unquestionably already been written and how the RBI and central government craft the new regulations will ultimately determine whether the flow of equity and debt capital to the microfinance sector is severed for years to come.

Facilitate fair restructuring of loans to MFIs to allow time for recovery. It is clear that if any meaningful recoveries are to take place, lenders and MFIs must work together through a mutually supportive approach to achieve a mutually beneficial outcome. With an exposure of over Rs 6,500 crore ($1.470BN) outstanding in AP, MFIs represent the only viable way for lenders to recover their loans to MFIs, given their relationship with the end customers. MFIs must be given the time to undo the damage inflicted by the AP Act, and to recover the loans from borrowers. In this regard, the terms and conditions applicable to the repayment of loans admitted by the CDR Cell for restructuring must be

favorable to the MFIs to ensure they are not penalized due to the external business factors created by the AP Act.

CRITICISIM FACED BY MICROFINANCE

Most criticisms of microfinance have actually been criticisms of microcredit, delivered in the absence of other microfinance services such as savings, remittances, payments and insurance. For example, there has been much criticism of the high interest rates charged to borrowers. The real average portfolio yield cited by the sample of 704 microfinance institutions that voluntarily submitted reports to the MicroBanking Bulletin in 2006 was 22.3% annually. However, annual rates charged to clients are higher, as they also include local inflation and the bad debt expenses of the microfinance institution. Muhammad Yunus has recently made much of this point, and in his latest book argues that microfinance institutions that charge more than 15% above their long-term operating costs should face penalties. Milford Bateman, the author of Why Doesn't Microfinance Work?, argues that microcredit offers only an "illusion of poverty reduction". "As in any lottery or game of chance, a few in poverty do manage to establish microenterprises that produce a decent living," he argues, but "these isolated and often temporary positives are swamped by the largely overlooked negatives." Bateman concludes that "The international development community is now faced with the reality that, overall, microfinance has been a development policy blunder of quite historic proportions." The role of donors has also been questioned. The Consultative Group to Assist the Poor (CGAP) recently commented that "a large proportion of the money they spend is not effective, either because it gets hung up in unsuccessful and often complicated funding mechanisms (for example, a government apex facility), or it goes to partners that are not held accountable for performance. In some cases, poorly conceived programs have retarded the development of inclusive financial systems by distorting markets and displacing domestic commercial initiatives with cheap or free money." There has also been criticism of microlenders for not taking more responsibility for the working conditions of poor households, particularly when borrowers become quasi-wage labourers, selling crafts or agricultural produce through an organization controlled by the MFI. The desire of MFIs to help their borrower diversify and increase their incomes has sparked this type of relationship in several countries, most notably Bangladesh, where hundreds of thousands of borrowers effectively work as wage labourers for the marketing subsidiaries of Grameen Bank or BRAC. Critics maintain that there are few if any rules or standards in these cases governing working hours, holidays, working conditions, safety or child labour, and few inspection regimes to correct abuses. Some of these concerns have been taken up by unions and socially responsible investment advocates. For example, BusinessWeek reported that some Mexicans are stumbling with terms of newly available funding.

Other criticism was raised by the IPO (Initial Public Offering) of a Mexican MFI Banco Compartamos in 2007. As the company put its shares on Mexican Stock Exchange it was able to generate very high profits that were achieved by rising interest rates on their micro-loans that at some point reached 86% per year. In July 2010 India's biggest MFI, SKS Microfinance also went public. In both instances Muhammad Yunus publicly stated his disagreement, saying that the poor should be the only beneficiaries of microfinance. Microcredit has been blamed for many suicides in India: aggressive lending by microcredit companies in Andhra Pradesh is said to have resulted in over 80 deaths in 2010. Some problems with microcredit are mistakenly alleged in The Micro Debt, a film by the Danish journalist Tom Heinemann.After a thorough investigation in December 2010 by the Norwegian Foreign Ministry, the alleged problems have been proven to be false and no further actions against the Grameen Bank and its founder, Muhammad Yunnis, have been taken. The documentary by Heinemann also looks at the effectiveness of Grameen Bank and alleges that it has little impact on poverty by highlighting the purported continued poverty of Sufiya Begum, the original loan recipient of Grameen, in Jobra Village. This allegation is disputed, since documentary maker Gayle Ferraro found the woman alive and well, confirming the original Grameen story.

MPACT OF MICROFINANCE ON ECONOMY

Growth alone is not enough if it does not produce a flow of benefits that are sufficiently wide-spread. We, therefore, need a growth process that is muchmore inclusive

This is what our Prime Minister, Dr. Manmohan Singh proclaimed in a speech on the eve of declaring the Budget last year. In the 21st Century, the Indian Economy is one of the fastest growing economies in the world with a growth rate of about 8%. Nations across the world have deemedIndia as the next economic power of the world. There is definitely a sense of optimism and aggression that our economy is portraying. However, this is an India which has been split into two worlds. One world, which is hungry for more and is touching the skies, whose appetite has stunned the world, and the other, in which people are committing suicide because they cant get two square meals a day, where levels of education, sanitation and health are comparable to those of Sub Saharan Africa. The growth rate in India has been largely exclusive and has not taken into account the state of rural areas. Ranked at 128 in the HDI index, India is a classic case of high growth and low development. In order to sustain such a high growth rate or increase it, we have to develop the roots of the country. These roots lie in the rural areas of India amongst the millions of villages. If India truly wants to shine in the world, it will have to give importance to rural development. One of the most powerful tools to do the same is through Microfinance. Having being implemented successfully in countries like Bangladesh, Bolivia, Kenya, Latvia and many more; Microfinance has been able to change the face of the economy in these countries. This is a concept which has been prevalent in India for quite some time but has never been given so much importance and has not been exploited enough to gain anything substantial out of it. The Government must understand that the poor stay poor, not because they are lazy but because they have no access to capital. By providing capital to them, the government can ensure rural as well as urban development. But what is microfinance? Microfinance is the provision of a broad range of financial services such as deposits, loans, payment services, money transfers and insurance to poor people so that they can they can improve their well being. Till date, a large number of poor people remain outside Formal Banking System. The rural penetration in banks is less than 18% and the existing banking policies are far from meeting their needs. About 75 million households live below the poverty line and the annual credit demand by the poor exceeds Rs 70,000 crores, out of which the cumulative disbursements is about Rs. 8000 crores. Only 5 % of rural poor have access to microfinance and the share of Microfinance in total credit of Indian Banking system is less than 1%.However, there is a growing popularity of microfinance in India with an expected growth rate of 20% in the next 5 years. All these facts and figures prove that the impact of such an ingenious tool is not even close to meeting the tremendous demand for low scale financial services. While the Microfinance Institutions (MFIs) have shown that serving the poor is not an unviable proposition, there are issues which have constrained MFIs while scaling up. These include limited access to equity, lack of an appropriate

legal apparatus and a sense of doubt and fear in the minds of private firms which believe that MF is full of risks and uncertainties. What the Government needs to do, in this financial year, is provide incentives to firms and companies to go ahead and set up MFIs in rural India. They need to alter the entire framework so that the environment becomes more conducive to firms. Even NABARD, the apex institute for rural finance, should play a very active role in promoting such kinds of private undertakings. MFIs basically act as an intermediary between the financial institutions and Self Help Groups (SHGs). This link needs to be strengthened. The Eleventh five year Plan aims at achieving a 4% growth rate in the agricultural sector. Even though this may seem like an uphill task, it is well within our reach if strategies like microfinance are given more importance. Microfinance as a tool is so useful that it serves more purposes than one. Apart from improving health and education standards, it also ensures gender empowerment. The latter is possible as large parts of these MF deals take place through women. Earlier, India believed in the trickle down effect and assumed that a very high growth rate would lead to more development and would consequently raise the standards of living. However, what has happened is quite the contrary. The Government needs to learn from its past mistakes and implement a down to up approach which involves strengthening the base of the country by mobilizing funds in rural India. The poor stay poor, not because they are lazy but because they have no access to capital. The flaw isnt in the concept, but in its implementation.

FUTURE OF MICROFINANCE

The vision of microfinance is quite simple - to create systemic change in financial systems worldwide. Instead of the exclusive financial systems that have for decades benefited and protected the wealthy, microfinance intends that they serve the impoverished majorities, help lift them out of poverty, and make them full participants in their country's social and economic development. In the next ten years, our task is to make certain that millions of poor men and women currently unserved

can access financial services. How do we get there? As we look forward, I will focus on what institutional channels we will use to extend financial services, who we will reach, what innovations we will need, and what role governments and donors will need to play. Before we consider what developments in microfinance we can expect by 2015 and what we need to have in place to reach our goal, let us examine where we are today. With that end in mind, ACCION sponsored a study in early 2005, "The Profile of Microfinance in Latin American in Ten Years: Vision & Characteristics[2]," coauthored by Beatriz Marulanda of Colombia and myself. The study explores the principle tendencies that characterize microfinance and its development in the coming ten years. We noted the consolidation of two approaches to the provision of financial services to low-income people in the region. They both have commercial criteria, which we think will prevail as a model in the coming years. We see first that MFIs still primarily operating as NGOs will undergo "upscaling," or transformation into regulated entities. At the same time, commercial banks entering the microenterprise sector will adopt "downscaling" to provide a range of financial services to the poor. This reality creates important opportunities for microfinance and new challenges as well. The study also demonstrated an ongoing (though evolving) role for NGOs as innovators in the field, developing new ways to extend credit to population sectors as yet not adequately served, including those in the poorest levels of society, people in rural areas, and those involved in small animal husbandry or agriculture. In countries where regulated entities have significant market penetration, we see a crucial role for NGOs in the provision of other services such as training and business advisory services for microentrepreneurs. As we have learned more about the financial needs of microentrepreneurs, it is clear that the target market for microfinance should be the entire microenterprise household. In addition, in Latin America, the target market is expanding to include low-income salaried workers. Within this expanded market, the industry agrees on the importance of offering a wide range of integrated financial services, including: ATMs and other aids to transactional efficiency, savings accounts, credit products such as consumer and housing loans, and insurance policies that would allow families to protect themselves against potential misfortune. ACCION's experience in Latin America and those of other leading MFIs around the world inform the next ten years. I emphasize here the leading microfinance institutions. Estimates indicate that there are 7,000 to 10,000 microfinance institutions worldwide, but in fact, just 150 to 200 of them are serving the vast majority of current clients. These leading MFIs share important commonalities: 1) a range of products developed specifically for their clientele; 2) the ability (and agility) to operate in competitive environments, and 3) consistent maintenance of a portfolio

at risk of less than five percent and repayment of 97-98 percent or higher. Their overall operation falls under what we call the "commercial approach" to microfinance, an approach that most industry players now embrace because they understand that to make a real impact on poverty, microfinance institutions must be permanent, economically viable entities capable of reaching ever-increasing numbers of people. The provision of financial services to the poorest people does not have to be contradictory to commercialization. However, it is quite clear that microcredit can only be provided to those people (or population segments) that have an established minimum capacity to repay a loan. Financial services for the poor are not a substitute for critical social services that are the responsibility of governments.

CHALLENGES REMAINING

A World Bank study assessing access to financial institutions found that amongst rural households in Andhra Pradesh and Uttar Pradesh, 59% lack access to deposit account and 78% lack access to credit. Considering that the majority of the 360 million poor households (urban and rural) lack access to formal financial services, the numbers of customers to be reached, and the variety and quantum of services to be provided are really large. Vijay Mahajan, Managing Director of BASICS, estimated that 90 million farm holdings, 30 million non-agricultural enterprises and 50 million landless households in India collectively need approx US$30 billion credit annually.This is about 5% of India's GDP and does not seem an unreasonable estimate. A tiny segment of this US$30 billion potential market has been reached so far and this is unlikely to be addressed by MFIs and NGOs alone. Reaching this market requires serious capital, technology and human resources. However, 80% of the financial sector is still controlled by public sector institutions. Competition, consolidation and convergence are all being discussed to improve efficiency and outreach but significant opposition remains; for example, the All India Bank Employees Association has threatened to strike if the Government proceeds with its

policy of reducing its capital in public sector banks, merging public sector banks or even enhancing Foreign Direct Investments in Indian private banks. Many speakers at the Microfinance India conference talked about the significant and growing gap between surging growth in South India, which contrasts with the stagnation in Eastern, Central and North Eastern India. Microfinance on its own is unlikely to be able to address formidable challenges of underdevelopment, poor infrastructure and governance. The Self Help Group movement is beginning to focus on issues of quality and there were some interesting discussions on embedding social performance monitoring as a part of the regular management information systems. At the time of the conference, a leading and responsible MFI was being investigated by the authorities for charging "high" rates of interest. Per unit transaction costs of small loans are high but many opinion leaders still persist with the notion poor people cannot be charged rates that are higher than commercial bank rates. The reality of the high transaction costs of serving small customers, their continuing dependence on the informal sector, the fact that most bankers shy away from retailing to this market as a business opportunity, and the poor quality of services currently provided does not figure prominently in this discourse. While the central bank has deregulated most interest rates, including lending to and by MFIs, interest rates restrictions on commercial bank for retail loans below US$5,000 (all microfinance and beyond) remain and caps on deposit rates also discourage sharing transaction costs with customers. But most conference participants accepted the imperatives to build sustainable institutions. There is still lot of policy focus on what activities are and are not allowed and not enough operational freedom as yet for banks and financial institutions to design and deliver programmes, and be responsible for their actions. Prescriptions and detailed circulars often limit organisational innovation and market segmentation. As Nachiket Mor of ICICI Bank said at the conference, if the right indicators are monitored and operational freedom and incentives are clear, both public and private banks have the capacity to rapidly address the remaining challenges.

CONCLUSION

We firmly believe that an integrated approach to servicing clients can enhance microfinances effectiveness as a poverty alleviation tool. The benefits of this approach are twofold.

First, by acting as a platform to deliver important social services along with credit and financial services, MFIs can contribute to greater sustainability at the client level. Integrating microfinance with social services such as health, education and natural disaster relief or prevention addresses the other contributing factors to poverty beyond the economic factor. In doing so, we are providing clients with a comprehensive solution to minimize the risks they face. By addressing the very issues that inhibit a clients chances of succeeding with microfinance, microfinance can increase its overall efficacy. Focusing on client sustainability instead of institutional sustainability is how the field can ensure that we are not just reaching more individuals, but that we are providing them with the services they really need once we do reach them, and that we accompany them throughout their journey to economic freedom. Second, using microfinance as a platform to offer integrated services increases economies of scope for all the organizations involved in trying to service the same base of clienteles. With leveraged resources assets, infrastructure, knowledge, distribution channels, etc. we can increase the capacity of the service offerings to reach more clients and to reach them more effectively. By partnering with other critical social providers and businesses and serving as a platform, microfinance can offer other organizations with a distribution channel to reach individuals in need, share experiences in working in a particular region and community, and offer countless other tangible and intangible products and services. This only makes sense because microfinance is not in the business of maximizing

profits but rather of maximizing lives touched and transformed. With that said, we encourage microfinance institutions to follow in the steps of pioneers, such as the Grameen Bank, BRAC, Pro Mujer, Fonkoze and Sareeram, in offering integrated services to their clients and to partner wherever it makes sense.

The fight to alleviate poverty is too great a task for anyone or any one discipline to combat it alone. As an entrenched and recognized leader in this mission, microfinance can serve as a bridge beyond banking and development. It can be the link that brings together the services and products available today to the people who need them most. Only through a collective effort will we have the best chance of succeeding.