INDIA

Submitted To-

Submitted ByRekha Tiwari PGDM (ABM),1013

MICROFINANCE
Microfinance is often defined as financial services for poor and low-income clients offered by different types of service providers. In practice, the term is often used more narrowly to refer to loans and other services from providers that identify themselves as microfinance institutions (MFIs). These institutions commonly tend to use new methods developed over the last 30 years to deliver very small loans to unsalaried borrowers, taking little or no collateral. 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. More broadly, microfinance refers to a movement that envisions a world in which lowincome households have permanent access to a range of high quality and affordable financial services offered by a range of retail providers to finance income-producing activities, build assets, stabilize consumption, and protect against risks. These services include savings, credit, insurance, remittances, and payments, and others.

MICROFINACE AND MICROCREDIT

Microcredit refers to very small loans for unsalaried borrowers with little or no collateral, provided by legally registered institutions. Currently, consumer credit provided to salaried workers based on automated credit scoring is usually not included in the definition of microcredit, although this may change. Microfinance typically refers to a range of financial services including credit, savings, insurance, money transfers, and other financial products provided by different service providers, targeted at poor and low-income people.

MICROFINANCE IN INDIA
In India, microfinance is done by organizations having diverse orientations, as shown in Figure. NGOs in India perform a range of developmental activities; microfinance usually is a sub-component. Some of these NGOs organize groups and link them to an existing provider of financial services. In some cases NGOs have a revolving fund that is used for lending. But in either of these cases, microfinance is not a core activity for these NGOs. An example is the Aga Khan Rural Support Programme India (AKRSP-I). For AKRSP-I, the microfinance component is incidental to its work in natural resource management. Examples like MYRADA and the Self-Employed Womens Association (SEWA) fall in the same category. However, as their microfinance portfolios grew, both organizations decided to form separate entities for microfinance. MYRADA set up an MFO called Sanghamitra Rural Financial Services (SRFS), while SEWA set up the SEWA Cooperative Bank. At the next level, we find NGOs helping the poor in economic activities. Their purpose is developmental. They see microfinance as an activity that feeds into economic activities. For instance, the South Indian Federation of Fishermens Societies (SIFFS) started as a support organization for fishermen, providing technical and marketing support.

Figure- Defining the microfinance egg

Overall objectives of the NGO include welfare activities, economic activities. Example: LupinHealth, Education, Agriculture, and Microfinance Spin-off microfinance units: MYRADA Sanghamithra Rural and Urban

Overall objective of the MFO is Predominantly economic activities. Example: SIFFS Economic activities for fishfolk, microfinance services are also provided

Spin-off: SEWA Sewa Bank Urban and Rural

Exclusive microfinance institutions Commercial funding for lending Operations.

Sustainability oriented: BASIX

Poverty focused: SHARE/CFTS

Developmental funding for capacity building; some initial capital for pump priming

Other sources

of funding for

Non microfinance economic activities

Other sources of funding for welfare activities

It then arranged for loans to its members through banks. When the arrangement was not effective, it started providing loans itself. At the third level, we have organizations with microfinance at the core. They have developmental roots, but are diverse in their operational details, orientation, and form of incorporation.

MFIs
More than subsidies poor need access to credit. Absence of formal employment makes them none `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.

OBJECTIVE Fast and sustainable economic growth and structure transformation. Good governance and security. Increased ability of the poor to raise their incomes. Increased quality of life of the poor. Microfinance plays a powerful role in reducing poverty. Government supported to microfinance institutions (MFIs) for providing financial services to the poor especially women with efforts have been put to provision of services especially credit and savings.

The impact of microcredit has been studied more than the impact of other forms of microfinance. Microcredit can provide a range of benefits that poor households highly value including long-term increases in income and consumption. A harsh aspect of poverty is that income is often irregular and undependable. Access to credit helps the poor to smooth cash flows and avoid periods where access to food, clothing, shelter, or education is lost. Credit can make it easier to manage shocks like sickness of a wage earner, theft, or natural disasters. The poor use credit to build assets such as buying land, which gives them future security. Women participants in microcredit programs often experience important self-empowerment. Empirical studies on the impact of credit are difficult and expensive to conduct and pose special methodological problems. Most impact studies to date have found significant benefits from microcredit. However, only a few studies have made serious efforts to compensate for the methodological challenges. In fact, many studies would not be regarded as meaningful by most professional econometricians. A new wave of randomized control trials are now in process, which should yield a more definitive picture. Even so, there is a strong indication from borrowers that microcredit improves their lives. They faithfully repay their loans even when the only compelling reason is to ensure continued access to the service in the future. Other microfinance services like savings, insurance, and money transfers have developed more recently, and there is less empirical research on their impact. Client demand indicates that poor people value such services. MFIs that offer good voluntary savings services typically attract far more savers than borrowers. Most poor people manage to mobilize resources to develop their enterprises and their dwellings slowly over time. Financial services could enable the poor to leverage their initiative, accelerating the process of building incomes, assets and economic security. However, conventional finance institutions seldom lend down-market to serve the needs of low-income families and women-headed households. They are very often denied access to credit for any purpose, making the discussion of the level of interest rate and other terms of finance irrelevant. Therefore the fundamental problem is not so much of unaffordable terms of loan as the lack of access to credit itself (Kim 1995). The lack of access to credit for the poor is attributable to practical difficulties arising from the discrepancy between the mode of operation followed by financial institutions and the economic characteristics and financing needs of low-income households. For example, commercial lending institutions require that borrowers have a stable source of income out of which principal and interest can be paid back according to the agreed terms. However, the income of many self employed households is not stable, regardless of its size. A large number of small loans are needed to serve the poor, but lenders prefer dealing with large loans in small numbers to minimize administration costs. They also look for collateral with a clear title - which many low-income households do not have. In addition bankers tend to consider low income households a bad risk imposing exceedingly high information monitoring costs on operation.

Over the last ten years, however, successful experiences in providing finance to small entrepreneur and producers demonstrate that poor people, when given access to responsive and timely financial services at market rates, repay their loans and use the proceeds to increase their income and assets. This is not surprising since the only realistic alternative for them is to borrow from informal market at an interest much higher than market rates. Community banks, NGOs and grassroots savings and credit groups around the world have shown that these microenterprise loans can be profitable for borrowers and for the lenders, making microfinance one of the most effective poverty reducing strategies. To the extent that microfinance institutions become financially viable, self sustaining, and integral to the communities in which they operate, they have the potential to attract more resources and expand services to clients. Despite the success of microfinance institutions, only about 2% of world's roughly 500 million small entrepreneurs are estimated to have access to financial services (Barry et al. 1996). Although there is demand for credit by poor and women at market interest rates, the volume of financial transaction of microfinance institution must reach a certain level before their financial operation becomes self sustaining. In other words, although microfinance offers a promising institutional structure to provide access to credit to the poor, the scale problem needs to be resolved so that it can reach the vast majority of potential customers who demand access to credit at market rates. The question then is how microenterprise lending geared to providing short term capital to small businesses in the informal sector can be sustained as an integral part of the financial sector and how their financial services can be further expanded using the principles, standards and modalities that have proven to be effective. To be successful, financial intermediaries that provide services and generate domestic resources must have the capacity to meet high performance standards. They must achieve excellent repayments and provide access to clients. And they must build toward operating and financial self-sufficiency and expanding client reach. Example-

In order to do so, microfinance institutions need to find ways to cut down on their administrative costs and also to broaden their resource base. Cost reductions can be achieved through simplified and decentralized loan application, approval and collection processes, for instance, through group loans which give borrowers responsibilities for much of the loan application process, allow the loan officers to handle many more clients and hence reduce costs (Otero et al. 1994). Microfinance institutions can broaden their resource base by mobilizing savings, accessing capital markets, loan funds and effective institutional development support. A logical way to tap capital market is securitization through a corporation that purchases loans made by microenterprise institutions with the funds raised through the bonds issuance on the capital market. There is at least one pilot attempt to securitize microfinance portfolio along these lines in Ecuador. As an alternative, BancoSol of Bolivia issued a certificate of deposit which is traded in Bolivian stock exchange. In 1994, it also issued certificates of deposit in the U.S. (Churchill 1996). The Foundation for Cooperation and Development of Paraguay issued bonds to raise capital for microenterprise lending (Grameen Trust 1995). Savings facilities make large scale lending operations possible. On the other hand, studies also show that the poor operating in the informal sector do save, although not in financial assets, and hence value access to client-friendly savings service at least as much access to credit. Savings mobilization also makes financial institutions accontable to local shareholders. Therefore, adequate savings facilities both serve the demand for financial services by the customers and fulfil an important requirement of financial sustainability to the lenders. Microfinance institutions can either provide savings services directly through deposit taking or make arrangements with other financial institutions to provide savings facilities to tap small savings in a flexible manner (Barry 1995). Convenience of location, positive real rate of return, liquidity, and security of savings are essential ingredients of successful savings mobilization (Christen et al. 1994). Once microfinance institutions are engaged in deposit taking in order to mobilize household savings, they become financial intermediaries. Consequently, prudential financial regulations become necessary to ensure the solvency and financial soundness of the institution and to protect the depositors. However, excessive regulations that do not consider the nature of microfinance institution and their operation can hamper their viability. In view of small loan size, microfinance institutions should be subjected to a minimum capital requirement which is lower than that applicable to commercial banks. On the other hand, a more stringent capital adequacy rate (the ratio between capital and risk assets) should be maintained because microfinance institutions provide uncollateralized loans. Governments should provide an enabling legal and regulatory framework which encourages the development of a range of institutions and allows them to operate as recognized financial intermediaries subject to simple supervisory and reporting requirements. Usury laws should be repelled or relaxed and microfinance institutions should be given freedom of setting interest rates and fees in order to cover operating and finance costs from interest revenues within a reasonable amount of time.

Government could also facilitate the process of transition to a sustainable level of operation by providing support to the lending institutions in their early stage of development through credit enhancement mechanisms or subsidies. One way of expanding the successful operation of microfinance institutions in the informal sector is through strengthened linkages with their formal sector counterparts. A mutually beneficial partnership should be based on comparative strengths of each sector. Informal sector microfinance institutions have comparative advantage in terms of small transaction costs achieved through adaptability and flexibility of operations (Ghate et al. 1992). They are better equipped to deal with credit assessment of the urban poor and hence to absorb the transaction costs associated with loan processing. On the other hand, formal sector institutions have access to broader resource-base and high leverage through deposit mobilization (Christen et al. 1994). Therefore, formal sector finance institutions could form a joint venture with informal sector institutions in which the former provide funds in the form of equity and the later extends savings and loan facilities to the urban poor. Another form of partnership can involve the formal sector institutions refinancing loans made by the informal sector lenders. Under these settings, the informal sector institutions are able to tap additional resources as well as having an incentive to exercise greater financial discipline in their management. Microfinance institutions could also serve as intermediaries between borrowers and the formal financial sector and on-lend funds backed by a public sector guarantee (Phelps 1995). Business-like NGOs can offer commercial banks ways of funding micro entrepreneurs at low cost and risk, for example, through leveraged bank-NGO-client credit lines. Under this arrangement, banks make one bulk loan to NGOs and the NGOs packages it into large number of small loans at market rates and recover them (Women's World Banking 1994). There are many on-going researches on this line but context specific research is needed to identify the most appropriate model. With this in mind we discuss various possible alternatives of formal-informal sector linkages in India. The main objectives of microcredit are followingsTo promote self-reliance and self-determination among workers through membership in an integrated nationwide savings system. To invest the provident savings of its members taking into consideration the profitability and safety of the funds as a means of providing them provident benefits upon termination of their membership in the Fund. To promote home ownership through the establishment of an affordable and adequate housing credit system for its members. To provide small and short loans and other benefits to its members.

Microfinance Institute provides following types microcredit and help to the poor people that they can uplift their life style. MFIs building financial services for the poor rural and urban poor people, which shows by given fig-

InstitutionsInstitutions adapted to delivering good products: That is committed to serving the poor. That is cost-effective. And A healthy environment for financial services for the poor: Stable macro-economic and financial management by government the rule of law. Helpful rather than restrictive legislation governing promoters and providers of financial services for the poor.

Promoters with mixed goalsWhere promoters have mixed goals this will affect the kind of financial service work that they can promote. For such institutions the main goals may be to develop social skills among the poor participatory management, leadership, solidarity, business acumen and so on - and savings-and credit schemes may be seen primarily as entry point activities, devices to lure the poor towards other less immediately attractive activities. Commonly, this work is done in a group context, and offers the opportunity to promote group-based savings schemes. However, such promoters usually want to phase out after a given period. The financial service activities of such groups should be chosen with these conditions in mind. For example, schemes like the Annual Savings Club described in Chapter

Three, or a two-year or three-year version of the same device, would be appropriate. From the promoters point of view, such clubs offer a vehicle through which social and management skills can be transferred to the poor. With the promoter acting as supervisor the risk of things going wrong should be low. These clubs are time bound, thereby relieving everyone of anxiety about what will happen when the promoter phases out? From the group members point of view, they will have the satisfaction of seeing a scheme mature and bear fruit, as they take home their savings-plus-profits at the end of the three years, while in the meantime they have had at their disposal a savings and loan service of a type that most poor people find useful. A few may use this experience to set up, manage or merely join similar schemes in their slum or village after phase-out. Not all social development NGOs believe that they should phase out after a certain period. Some set up permanent branches at slum or village level. These NGOs are well placed to foster user-owned schemes that have the potential to become long-lasting or permanent userowned and managed institutions along the lines of the Credit Union (see the previous chapter and the next section below). They may also (or alternatively) become managers (in the sense used in Chapter Three) and run long-cycle schemes for their members on a non-profit making basis, such as marriage or burial funds, or a multi-cycle ASCs or even ROISCAs. Or, of course, they may develop (as far as financial services work is concerned) into permanent providers as the Bangladesh NGO Proshika has done over the last few years. The stresses of mixing social development work with financial service provision are, however, considerable, and NGOs wishing to go down that line would be well advised to study the experience of path-breakers like Proshika.

ProvidersUnlike promoters, providers face no general limitations on the kinds of products they can offer. Their task is threefold. They must develop the right products (those that are in demand by their prospective clientele). They must design a delivery system that ensures that the product reaches the poor. They must control their costs so that they can deliver the services at prices that their clients are willing to pay but which allow them to cover all their costs. The second and third of these tasks - how to make sure you are really reaching the poor and how to reconcile that outreach with full cost-recovery - have sparked the fiercest debates and driven some of the finest innovations in the field of financial services for the poor in the 1990s. The literature and training courses and workshops devoted to these intertwined issues have grown enormously, and even a summary would be far beyond the capacity of this essay. The bibliography provides pointers to some of the excellent texts that I happened to have read, and to some courses. But the first of these three tasks - the development of the right financial products - has been the orphan of the research effort and is only now coming into its own. For every ten articles on whether the Grameen Bank is pushing people above the poverty line, or whether Grameen Bank members use contraceptives more often than non-members, or send their children to school more, or get beaten unless often by their husbands, youll find only one article

asking basic questions about the design of Grameens products. Questions like should there be other loan terms besides the one-year weekly repayment term? The essay ends, therefore, where it started, among poor people in their villages and slums, looking at how we find out about their financial service requirements.

Product designFinding out

Good product design begins with knowing something about the prospective customers and their financial service preferences. The best way of assembling this knowledge is to find out what services are already available, and to ask people why they are using them, and what they like and dislike about them. It might seem that this can be followed up by asking people what other financial services they would like, but I have found that this is not a helpful question, mainly because the illiterate poor are often unaware of what those other services might be. A better way, in my experience, is to ask people how they manage circumstances that are amenable to financial service intervention. For example, in a village where there are many short-term ROSCAs but nothing else, you might ask people how they manage reserves for their old age, or where they go to get quick cash in small amounts for household emergencies. In the Philippines I was pottering about in villages that had a good Credit Union which gave loans for productive uses but little else. When I asked the villagers what other financial services they would like they were unable to articulate anything. So, knowing that Filipinos are getting increasingly interested in education, I asked them how they financed school and college costs and quickly discovered that this was a matter of considerable anxiety for them. When I told them that I knew of a bank that ran a contractual savings scheme aimed at helping people save up in easy monthly deposits for school fees, I was bombarded with requests to bring that bank to our village, and several women tried to get me to accept their savings there and then.

Savings and loans, not savings or loansIn planning the product you wish to deliver, try to avoid sterile arguments about whether the poor need savings or loans. As I hope this essay has made clear, this is a false opposition. It is much more helpful to think creatively about ways of collecting small sums (be they savings or repayments or insurance premiums) and then of ways of turning them into large sums (be they loans, or withdrawals from savings, or insurance pay-outs). The poor dont have a natural preference for savings over loans, or vice versa - they have a need to turn small pay-ins into large take-outs. They will use whichever version of the two basic swaps (savings followed by withdrawals, and advances followed by repayments) is on offer, and if both are on offer theyll take whichever is most convenient for them at that moment for that particular need. The terms of the offer made them will be an important factor in their decision. Safe Save has shown this. Where it has offered low rates of interest on savings but generous loan sizes with low interest, most clients have chosen to take loans. In other experiments where the rate paid on savings has been raised and the permitted loan sizes lowered and their price hiked, far fewer clients take loans and more choose instead to save and withdraw. Again, the fact that almost every Grameen client is a borrower whereas most clients of Bank Rakyat Indonesia (a famous MFI in that country) are savers does not show that

Bangladeshis have a greater propensity to borrow than do Indonesians. It merely reflects differences in the products available to them. Like this fig-

Characteristics and Challenges of MFIs-

Service
Rapid, suitable right of entry Respect, connection

Asset Building, Risk justifying Products

Voluntary savings Health and life insurance

Flexible Loans
Small initial loan sizes Larger loans over time Longer conditions

What The Poor Want

Variety of Products
Housing loans Education loans Life cycle products Business development services

Group

Individual Loans

No customary security
Source: WWB research

Challenges Lack of trained staff. Lack of motivated staff. Difficult to incentives staff. Absence of the right organizational structures by the MFIs. Impact of institutional culture. Growth management of MFIs. Growth and commercialization of the industry. Slow process of improving governance of MFIs.

List of top 20 MFIs in INDIA 1. SKS Microfinance Ltd (SKSMPL) 2 Spandana Sphoorty Financial Ltd (SSFL) 3 Share Microfin Limited (SML) 4 Asmitha Microfin Ltd (AML) 5 Shri Kshetra Dharmasthala Rural Development Project(SKDRDP) 6 Bhartiya Samruddhi Finance Limited (BSFL) 7 Bandhan Society 8 Cashpor Micro Credit (CMC) 9 Grama Vidiyal Micro Finance Pvt Ltd (GVMFL) 10 Grameen FinancialServices Pvt Ltd (GFSPL) 11 Madura Micro Finance Ltd (MMFL) 12 BSS Microfinance Bangalore Pvt Ltd (BMPL) 13 Equitas Micro Finance India P Ltd (Equitas) 14 Bandhan Financial Services Pvt Ltd (BFSPL) 15 Sarvodaya Nano Finance Ltd (SNFL) 16 BWDA Finance Limited (BFL) 17 Ujjivan FinancialServices Pvt Ltd (UFSPL) 18 Future Financial Services ChittoorLtd (FFSL) 19 ESAF Microfinance & Investments Pvt. Ltd (EMFIL) 20 S.M.I.L.E Microfinance Limited