EXECUTIVE SUMMARY

The imagination, with which microfinance was put into practice, has been turning into a reality in India. The unparalleled growth of microfinance institutions, to cover a vast majority of unbanked population in need of financial services, is just a step towards achieving the goals of development for building an equitable society. Microfinance initiatives have been accepted at different levels viz. the policy makers, the regulators and the implementers, as an effective way to address the financial needs of the poor. The crucial role of microfinance in alleviating poverty and need for an enabling regulation for microfinance sector has been acknowledged by various high-level government committees. In India too the formal financial institutions have not been able to reach the poor households, and particularly women, in the unorganised sector. Structural rigidities and overheads lead to high cost of making small loans. Organisational philosophy has not been oriented towards recognising the poor as credit worthy. The problem has been compounded by low level of influence of the poor, either about their credit worthiness or their demand for savings services. Micro-finance programmes have often been implemented by large banks at government behest. Low levels of recovery have been further eroded due to loan waiver programmes leading to institutional disenchantment with lending to small borrowers. All this gave rise to the concept of micro-credit for the poorest segment along with a new set of credit delivery techniques. With the support of NGOs an informal sector comprising small Self Help Groups (SHGs) started mobilizing savings of their members and lending these resources among the members on a micro scale. The potential of these SHGs to develop as local financial intermediaries to reach the poor has gained recognition due to their community based participatory approach and sustainability - recovery rates have been significantly higher than those achieved by commercial banks inspite of loans going to poor, unorganised individuals without security or collateral. Microfinance has proven to be a very effective development tool because it provides empowerment instead of charity. Typically, microfinance clients are self-employed household entrepreneurs who lack the resources to invest in their business and their future and thus cannot escape the grips of extreme poverty. MFIs could play a significant role in facilitating inclusion, as they are uniquely positioned in reaching out to the rural poor. Many of them operate in a limited geographical area, have a greater understanding of the issues specific to the rural poor,

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enjoy greater acceptability amongst the rural poor and have flexibility in operations providing a level of comfort to their clientele. 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 microcredit: the provision of small loans to very poor families to help them engage in productive and selfsustaining activities. Since the successful initiation of formalised microcredit in the 1980s a number of other complementary services have popped up around the globe, including micro savings, micro insurance etc. Microfinance is not a solution to all the worlds problems, but seems to be effective in encouraging entrepreneurship, increasing the income of the poorest and helping them to build viable businesses. The sector is booming and there has never been so much attention given to this sector. Furthermore, there seems to be a great deal of opportunity for young professionals

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OBJECTIVE OF THE STUDY

OBJECTIVE OF STUDY
To understand the concept of Microfinance. To analyse the functioning of microfinance in India.

Understand opportunities and challenges faced by microfinance in India Analyze the recent case of SKS Microfinance and study in depth about the hurdles
faced by these institutions.

Analyze in depth the recommendations made by the RBI appointed Malegam

Committee.

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INTRODUCTION
Microfinance is defined as any activity that includes the provision of financial services such as credit, savings, and insurance to low income individuals which fall just above the nationally defined poverty line, and poor individuals which fall below that poverty line, with the goal of creating social value. The creation of social value includes poverty alleviation and the broader impact of improving livelihood opportunities through the provision of capital for micro enterprise, and insurance and savings for risk mitigation and consumption smoothing. A large variety of actors provide microfinance in India, using a range of microfinance delivery methods. Since the ICICI Bank in India, various actors have endeavoured to provide access to financial services to the poor in creative ways. Governments also have piloted national programs, NGOs have undertaken the activity of raising donor funds for on-lending, and some banks have partnered with public organizations or made small inroads themselves in providing such services. This has resulted in a rather broad definition of microfinance as any activity that targets poor and low-income individuals for the provision of financial services. The range of activities undertaken in microfinance include group lending, individual lending, the provision of savings and insurance, capacity building, and agricultural business development services. Whatever the form of activity however, the overarching goal that unifies all actors in the provision of microfinance is the creation of social value. 1.1 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. In India, Microfinance has been defined by The National Microfinance Taskforce, 1999 as provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards. "The poor stay poor, not because they are lazy but because they have no access to capital." The dictionary meaning of finance is management of money. The management of money denotes acquiring & using money. Microfinance is buzzing word, used when financing for micro entrepreneurs. Concept of microfinance has emerged in order to meet the special goal of
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empowering under-privileged class of society, women, and poor, downtrodden by natural reasons or manmade; caste, creed, religion or otherwise. The principles of Microfinance are founded on the philosophy of cooperation and its central values of equality, equity and mutual self-help. At the heart of these principles are the concept of human development and the brotherhood of man expressed through people working together to achieve a better life for themselves and their children. Traditionally microfinance was focused on providing a very standardized credit product. The poor, just like anyone else need a diverse range of financial instruments to be able to build assets, stabilize consumption and protect themselves against risks. Thus, we see a broadening of the concept of microfinance--- our current challenge is to find efficient and reliable ways of providing a richer menu of microfinance products. Microfinance is not merely extending credit, but extending credit to those who require most for themselves and theirs familys survival.

Who are the clients of microfinance? The typical microfinance clients are low-income persons that do not have access to formal financial institutions. Microfinance clients are typically self-employed, often household-based 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 unstable 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. On the other hand, the chances are that, the poorer you are, the more expensive or onerous informal financial arrangements. Moreover, informal arrangements may not suitably meet certain financial service needs or may exclude you anyway. Individuals in this excluded and under-served market segment are the clients of microfinance. As we broaden the notion of the types of services microfinance encompasses, the potential market of microfinance clients also expands. It depends on local conditions and political climate, activeness of cooperatives, SHG & NGOs and support mechanism. 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, would like a safer place to save the proceeds from their harvest as these are
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consumed over several months by the requirements of daily living. Central government in India has established a strong & extensive link between NABARD (National Bank for Agriculture & Rural Development), State Cooperative Bank, District Cooperative Banks, Primary Agriculture & Marketing Societies at national, state, district and village level. The Need for Microfinance in India

India is said to be the home of one third of the worlds poor; official estimates range from 26 to 50 percent of the more than one billion population.

About 87 percent of the poorest households do not have access to credit. The demand for microcredit has been estimated at up to $30 billion; the supply is less than $2.2 billion combined by all involved in the sector.

Due to the sheer size of the population living in poverty, India is strategically significant in the global efforts to alleviate poverty and to achieve the Millennium Development Goal of halving the worlds poverty by 2015. Microfinance has been present in India in one form or another since the 1970s and is now widely accepted as an effective poverty alleviation strategy. Over the last five years, the microfinance industry has achieved significant growth in part due to the participation of commercial banks. Despite this growth, the poverty situation in India continues to be challenging. Some principles that summarize a century and a half of development practice were encapsulated in 2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by the Group of Eight leaders at the G8 Summit on June 10, 2004: Poor people need not just loans but also savings, insurance and money transfer services. Microfinance must be useful to poor households: helping them raise income, build up assets and/or cushion themselves against external shocks. Microfinance can pay for itself. Subsidies from donors and government are scarce and uncertain, and so to reach large numbers of poor people, microfinance must pay for itself. Microfinance means building permanent local institutions. Microfinance also means integrating the financial needs of poor people into a countrys mainstream financial system. The job of government is to enable financial services, not to provide them.
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Donor funds should complement private capital, not compete with it. The key bottleneck is the shortage of strong institutions and managers. Donors should focus on capacity building. Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs, which chokes off the supply of credit. Microfinance institutions should measure and disclose their performance both financially and socially.

Microfinance can also be distinguished from charity. It is better to provide grants to families who are destitute, or so poor they are unlikely to be able to generate the cash flow required to repay a loan. This situation can occur for example, in a war zone or after a natural disaster. Financial needs and financial services In developing economies and particularly in the rural areas, many activities that would be classified in the developed world as financial are not monetized: that is, money is not used to carry them out. Almost by definition, poor people have very little money. But circumstances often arise in their lives in which they need money or the things money can buy. In Stuart Rutherfords recent book The Poor and Their Money, he cites several types of needs:

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 war or bulldozing of dwellings.

Investment Opportunities: expanding a business, buying land or equipment, improving housing, securing a job (which often requires paying a large bribe), etc.

Poor people find creative and often collaborative ways to meet these needs, primarily through creating and exchanging different forms of non-cash value. Common substitutes for cash vary from country to country but typically include livestock, grains, jewellery and precious metals. As Marguerite Robinson describes in The Microfinance Revolution, the 1980s demonstrated that microfinance could provide large-scale outreach profitably, and in the 1990s, microfinance began to develop as an industry. In the 2000s, the microfinance industrys
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objective is to satisfy the unmet demand on a much larger scale, and to play a role in reducing poverty. While much progress has been made in developing a viable, commercial microfinance sector in the last few decades, several issues remain that need to be addressed before the industry will be able to satisfy massive worldwide demand. The obstacles or challenges to building a sound commercial microfinance industry include: Inappropriate donor subsidies Poor regulation and supervision of deposit-taking MFIs Few MFIs that mobilize savings Limited management capacity in MFIs Institutional inefficiencies Need for more dissemination and adoption of rural, agricultural microfinance methodologies Role of Microfinance: The micro credit of microfinance programme was first initiated in the year 1976 in Bangladesh with promise of providing credit to the poor without collateral, alleviating poverty and unleashing human creativity and endeavor of the poor people. Microfinance impact studies have demonstrated that Microfinance helps poor households meet basic needs and protects them against risks. The use of financial services by low-income households leads to improvements in household economic welfare and enterprise stability and growth. By supporting womens economic participation, microfinance empowers women, thereby promoting gender-equity and improving household well being. The level of impact relates to the length of time clients have had access to financial services.

The Origin of Microfinance

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Although neither of the terms microcredit or microfinance were used in the academic literature nor by development aid practitioners before the 1980s or 1990s, respectively, the concept of providing financial services to low income people is much older. While the emergence of informal financial institutions in Nigeria dates back to the 15th century, they were first established in Europe during the 18th century as a response to the enormous increase in poverty since the end of the extended European wars (1618 1648). In 1720 the first loan fund targeting poor people was founded in Ireland by the author Jonathan Swift. After a special law was passed in 1823, which allowed charity institutions to become formal financial intermediaries a loan fund board was established in 1836 and a big boom was initiated. Their outreach peaked just before the government introduced a cap on interest rates in 1843. At this time, they provided financial services to almost 20% of Irish households. The credit cooperatives created in Germany in 1847 by Friedrich Wilhelm Raiffeisen served 1.4 million people by 1910. He stated that the main objectives of these cooperatives should be to control the use made of money for economic improvements, and to improve the moral and physical values of people and also, their will to act by themselves. In the 1880s the British controlled government of Madras in South India, tried to use the German experience to address poverty which resulted in more than nine million poor Indians belonging to credit cooperatives by 1946. During this same time the Dutch colonial administrators constructed a cooperative rural banking system in Indonesia based on the Raiffeisen model which eventually became Bank Rakyat Indonesia (BRI), now known as the largest MFI in the world.

Microfinance Today

In the 1970s a paradigm shift started to take place. The failure of subsidized government or donor driven institutions to meet the demand for financial services in developing countries let to several new approaches. Some of the most prominent ones are presented below. Bank Dagan Bali (BDB) was established in September 1970 to serve low income people in Indonesia without any subsidies and is now well-known as the earliest bank to institute commercial microfinance. While this is not true with regard to the achievements made in Europe during the 19th century, it still can be seen as a turning point with an ever increasing impact on the view of politicians and development aid practitioners throughout the world. In 1973 ACCION International, a United States of America (USA) based nongovernmental organization (NGO) disbursed its first loan in Brazil and in 1974 Professor Muhammad Yunus
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started what later became known as the Grameen Bank by lending a total of $27 to 42 people in Bangladesh. One year later the Self-Employed Womens Association started to provide loans of about $1.5 to poor women in India. Although the latter examples still were subsidized projects, they used a more business oriented approach and showed the world that poor people can be good credit risks with repayment rates exceeding 95%, even if the interest rate charged is higher than that of traditional banks. Another milestone was the transformation of BRI starting in 1984. Once a loss making institution channelling government subsidized credits to inhabitants of rural Indonesia it is now the largest MFI in the world, being profitable even during the Asian financial crisis of 1997 1998. In February 1997 more than 2,900 policymakers, microfinance practitioners and representatives of various educational institutions and donor agencies from 137 different countries gathered in Washington D.C. for the first Micro Credit Summit. This was the start of a nine year long campaign to reach 100 million of the world poorest households with credit for self employment by 2005. According to the Microcredit Summit Campaign Report 67,606,080 clients have been reached through 2527 MFIs by the end of 2002, with 41,594,778 of them being amongst the poorest before they took their first loan. Since the campaign started the average annual growth rate in reaching clients has been almost 40 percent. If it has continued at that speed more than 100 million people will have access to microcredit by now and by the end of 2005 the goal of the microcredit summit campaign would be reached. As the president of the World Bank James Wolfensohn has pointed out, providing financial services to 100 million of the poorest households means helping as many as 500 600 million poor people. Strategic Policy Initiatives Some of the most recent strategic policy initiatives in the area of Microfinance taken by the government and regulatory bodies in India are: Working group on credit to the poor through SHGs, NGOs, NABARD, 1995 The National Microfinance Taskforce, 1999 Working Group on Financial Flows to the Informal Sector (set up by PMO), 2002 Microfinance Development and Equity Fund, NABARD, 2005 Working group on Financing NBFCs by Banks- RBI

Activities in Microfinance
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Microcredit: It is a small amount of money loaned to a client by a bank or other institution. Microcredit can be offered, often without collateral, to an individual or through group lending. Micro savings: These are deposit services that allow one to save small amounts of money for future use. Often without minimum balance requirements, these savings accounts allow households to save in order to meet unexpected expenses and plan for future expenses. Micro insurance: It is a system by which people, businesses and other organizations make a payment to share risk. Access to insurance enables entrepreneurs to concentrate more on developing their businesses while mitigating other risks affecting property, health or the ability to work. Remittances: These are transfer of funds from people in one place to people in another, usually across borders to family and friends. Compared with other sources of capital that can fluctuate depending on the political or economic climate, remittances are a relatively steady source of funds. Legal Regulations Banks in India are regulated and supervised by the Reserve Bank of India (RBI) under the RBI Act of 1934, Banking Regulation Act, Regional Rural Banks Act, and the Cooperative Societies Acts of the respective state governments for cooperative banks. NBFCs are registered under the Companies Act, 1956 and are governed under the RBI Act. There is no specific law catering to NGOs although they can be registered under the Societies Registration Act, 1860, the Indian Trust Act, 1882, or the relevant state acts. There has been a strong reliance on self-regulation for NGO MFIs and as this applies to NGO MFIs mobilizing deposits from clients who also borrow. This tendency is a concern due to enforcement problems that tend to arise with self-regulatory organizations. In January 2000, the RBI essentially created a new legal form for providing microfinance services for NBFCs registered under the Companies Act so that they are not subject to any capital or liquidity requirements if they do not go into the deposit taking business. Absence of liquidity requirements is concern to the safety of the sector.

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Legislation Affecting Institutions Engaged in Micro-Finance (Directly or indirectly) The Legal formats of MFIs that are provided by Indian law can be classified by the profit motive: Not-For-Profit Entities are trusts, societies and section 25 companies. For-Profit enterprises are Non-Banking Financial Companies (NBFCs). The following legislations regulate the functioning of MFIs in India (i) Reserve Bank of India Act, 1934 The Reserve Bank of India Act 1934 establishes the central bank (Banking Regulatory Authority of India). It is of interest to the question of the regulation of micro-finance in that under a 1977 Amendment it contains provisions for the establishment and operations of nonbank finance companies (Chapter 3-B, Sections 45-I). The non-banking institutions can be a company, a corporation or a cooperative society. A non-bank financial company (NBFC) is a non-banking institution company and takes deposits. NBFCs are registered under this Act (Second Schedule). (ii) Banking Regulation Act 1949 The Banking Regulation Act 1949 covers banking companies. It does not apply to primary agriculture credit societies, cooperative land mortgage banks and any other cooperative society. It is not directly relevant to micro-finance, other than the fact that it coves local area banks and commercial banks, which are involved in linkage operations. The Banking Regulation Act provides the basis for the licensing of local area banks and mutual benefit societies. (iii) Companies Act 1956 The companies Act 1952 provides the basis for the incorporation of Local Area Banks, NonBank Finance Companies, non-for-profit Section 25 Companies and Nidhis under Section 620. Certain revisions have been proposed in the Companies Act which would allow cooperatives in the form of companies and could offer micro-finance services

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Co-operative Societies Act of 1904; Mutually Aided Co-operative Societies Act in 1995 (Andhra Pradesh) Societies Registration Act of 1860 and Indian Trusts Act -1882. The term cooperative covers a range of institutions, both formal (stated-owned cooperatives banks) and semi-formal (cooperative societies), which are regulated and/or unregulated. Enterprises registered under the Societies registration or Indian Trusts Acts are semi-formal institutions engaged in micro-finance. The Acts do not provide a basis for any of regulation so far. There is a tax problem in that societies and trusts cannot engage in for-profit activities, including financial services. Co-operative Societies Act of 1904 covers cooperative, SEWA Bank is registered as a cooperative society, under this act but is regulated by the RBI from which it obtained a banking license. With the post liberalization era, market-oriented approach to rural finance advocated a new form of co-operative societies act. Andhra Pradesh enacted the mutually Aided Co-operative Societies Act in 1995, allowing the formation of cooperatives largely immune from government intervention. Three other States subsequently enacted similar legislation (Bihar, Madhya Pradesh and Jammu & Kashmir). The Multi-State Co-operatives Societies Bill Act 2002 is operative currently and it replaces the MCS Act, 1984.

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STRUCTURE OF MICROFINANCE INSTITUTION IN INDIA

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MICROFINANCE IN INDIA
Microfinance changing the face of poor India Micro-Finance is emerging as a powerful instrument for poverty alleviation in the new economy. In India, micro-Finance scene is dominated by Self Help Groups (SHGs) - Banks linkage Programme, aimed at providing a cost effective mechanism for providing financial services to the 'unreached poor'. In the Indian context terms like "small and marginal farmers", " rural artisans" and "economically weaker sections" have been used to broadly define microfinance customers. Research across the globe has shown that, over time, microfinance clients increase their income and assets, increase the number of years of schooling their children receive, and improve the health and nutrition of their families. A more refined model of micro-credit delivery has evolved lately, which emphasizes the combined delivery of financial services along with technical assistance, and agricultural business development services. When compared to the wider SHG bank linkage movement in India, private MFIs have had limited outreach. However, we have seen a recent trend of larger microfinance institutions transforming into Non-Bank Financial Institutions (NBFCs). This changing face of microfinance in India appears to be positive in terms of the ability of microfinance to attract more funds and therefore increase outreach. In terms of demand for micro-credit or micro-finance, there are three segments, which demand funds. They are:

At the very bottom in terms of income and assets, are those who are landless and engaged in agricultural work on a seasonal basis, and manual labourers in forestry, mining, household industries, construction and transport. This segment requires, first and foremost, consumption credit during those months when they do not get labour work, and for contingencies such as illness. They also need credit for acquiring small productive assets, such as livestock, using which they can generate additional income.

The next market segment is small and marginal farmers and rural artisans, weavers and those self-employed in the urban informal sector as hawkers, vendors, and workers in household micro-enterprises. This segment mainly needs credit for working capital, a small part of which also serves consumption needs. This segment also needs term credit for acquiring additional productive assets, such as irrigation
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pump sets, bore wells and livestock in case of farmers, and equipment (looms, machinery) and work sheds in case of non-farm workers.

The third market segment is of small and medium farmers who have gone in for commercial crops such as surplus paddy and wheat, cotton, groundnut, and others engaged in dairying, poultry, fishery, etc. Among non-farm activities, this segment includes those in villages and slums, engaged in processing or manufacturing activity, running provision stores, repair workshops, tea shops, and various service enterprises. These persons are not always poor, though they live barely above the poverty line and also suffer from inadequate access to formal credit.

Well these are the people who require money and with Microfinance it is possible. Right now the problem is that, it is SHGs' which are doing this and efforts should be made so that the big financial institutions also turn up and start supplying funds to these people. This will lead to a better India and will definitely fulfil the dream of our late Prime Minister, Mrs. Indira Gandhi, i.e. Poverty. One of the statements is really appropriate here, which is as: Money, says the proverb makes money. When you have got a little, it is often easy to get more. The great difficulty is to get that little.Adams Smith. Today India is facing major problem in reducing poverty. About 25 million people in India are under below poverty line. With low per capita income, heavy population pressure, prevalence of massive unemployment and underemployment, low rate of capital formation, misdistribution of wealth and assets, prevalence of low technology and poor economics organization and instability of output of agriculture production and related sectors have made India one of the poor countries of the world. Present Scenario of India: India falls under low income class according to World Bank. It is second populated country in the world and around 70 % of its population lives in rural area. 60% of people depend on agriculture, as a result there is chronic underemployment and per capita income is only $ 3262. This is not enough to provide food to more than one individual. The obvious result is abject poverty, low rate of education, low sex ratio, and exploitation. The major factor account for high incidence of rural poverty is the low asset base. According to Reserve Bank of India,
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about 51 % of people house possess only 10% of the total asset of India .This has resulted low production capacity both in agriculture (which contribute around 22-25% of GDP) and Manufacturing sector. Rural people have very low access to institutionalized credit (from commercial bank). Poverty alleviation programmes and conceptualization of Microfinance: There have been continuous efforts of planners of India in addressing the poverty. They have come up with development programmes like Integrated Rural Development progamme (IRDP), National Rural Employment Programme (NREP), Rural Labour Employment Guarantee Programme (RLEGP) etc. But these progamme have not been able to create massive impact in poverty alleviation. The production oriented approach of planning without altering the mode of production could not but result of the gains of development by owners of instrument of production. The mode of production does remain same as the owner of the instrument have low access to credit which is the major factor of production. Thus in Nineties National bank for agriculture and rural development (NABARD) launches pilot projects of Microfinance to bridge the gap between demand and supply of funds in the lower rungs of rural economy. Microfinance. The buzzing word of this decade was meant to cure the illness of rural economy. With this concept of Self Reliance, Self Sufficiency and Self Help gained momentum. The Indian microfinance is dominated by Self Help Groups (SHGs) and their linkage to Banks. Deprived of the basic banking facilities, the rural and semi urban Indian masses are still relying on informal financing intermediaries like money lenders, family members, friends etc. Banking Expansion Starting in the late 1960s, India was the home to one of the largest state interventions in the rural credit market. This phase is known as the Social Banking phase. It witnessed the nationalization of existing private commercial banks, massive expansion of branch network in rural areas, mandatory directed credit to priority sectors of the economy, subsidized rates of interest and creation of a new set of regional rural banks (RRBs) at the district level and a specialized apex bank for agriculture and rural development (NABARD) at the national level. The Net State Domestic Product (NSDP) is a measure of the economic activity in the state and comparing it with the utilization of bank credit or bank deposits indicates how much economic
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activity is being financed by the banks and whether there exists untapped potential for increasing deposits in that state. Microfinance Social Aspects Micro financing institutions significantly contributed to gender equality and womens empowerment as well as poor development and civil society strengthening. Contribution to womens ability to earn an income led to their economic empowerment, increased well being of women and their families and wider social and political empowerment. Microfinance programs targeting women became a major plank of poverty alleviation and gender strategies in the 1990s. Increasing evidence of the centrality of gender equality to poverty reduction and womens higher credit repayment rates led to a general consensus on the desirability of targeting women. Self Help Groups (SHGs) Self- help groups (SHGs) play today a major role in poverty alleviation in rural India. A growing number of poor people (mostly women) in various parts of India are members of SHGs and actively engage in savings and credit (S/C), as well as in other activities (income generation, natural resources management, literacy, child care and nutrition, etc.). The S/C focus in the SHG is the most prominent element and offers a chance to create some control over capital, albeit in very small amounts. The SHG system has proven to be very relevant and effective in offering women the possibility to break gradually away from exploitation and isolation. How self-help groups work NABARD (1997) defines SHGs as "small, economically homogenous affinity groups of rural poor, voluntarily formed to save and mutually contribute to a common fund to be lent to its members as per the group members' decision". Most SHGs in India have 10 to 25 members, who can be either only men, or only women, or only youth, or a mix of these. As women's SHGs or sangha have been promoted by a wide range of government and non- governmental agencies, they now make up 90% of all SHGs. The rules and regulations of SHGs vary according to the preferences of the members and those facilitating their formation. A common characteristic of the groups is that they meet regularly (typically once per week or once per fortnight) to collect the savings from members, decide to
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which member to give a loan, discuss joint activities (such as training, running of a communal business, etc.), and to mitigate any conflicts that might arise. Most SHGs have an elected chairperson, a deputy, a treasurer, and sometimes other office holders. Most SHGs start without any external financial capital by saving regular contributions by the members. These contributions can be very small (e.g. 10 Rs per week). After a period of consistent savings (e.g. 6 months to one year) the SHGs start to give loans from savings in the form of small internal loans for micro enterprise activities and consumption. Only those SHGs that have utilized their own funds well are assisted with external funds through linkages with banks and other financial intermediaries. However, it is generally accepted that SHGs often do not include the poorest of the poor, for reasons such as: (a) Social factors (the poorest are often those who are socially marginalized because of caste affiliation and those who are most sceptical of the potential benefits of collective action). (b) Economic factors (the poorest often do not have the financial resources to contribute to the savings and pay membership fees; they are often the ones who migrate during the lean season, thus making group membership difficult). (c) Intrinsic biases of the implementing organizations (as the poorest of the poor are the most difficult to reach and motivate, implementing agencies tend to leave them out, preferring to focus on the next wealth category). Sources of capital and links between SHGs and Banks SHGs can only fulfil a role in the rural economy if group members have access to financial capital and markets for their products and services. While the groups initially generate their own savings through thrift (whereby thrift implies savings created by postponing almost necessary consumption, while savings imply the existence of surplus wealth), their aim is often to link up with financial institutions in order to obtain further loans for investments in rural enterprises. NGOs and banks are giving loans to SHGs either as "matching loans" (whereas the loan amount is proportionate to the group's savings) or as fixed amounts, depending on the group's record of repayment, recommendations by group facilitators, collaterals provided, etc.

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How SHGs save Self-help groups mobilize savings from their members, and may then on-lend these funds to one another, usually at apparently high rates of interest which reflect the members understanding of the high returns they can earn on the small sums invested in their microenterprises, and the even higher cost of funds from money lenders. If they do not wish to use the money, they may deposit it in a bank. If the members need for funds exceeds the groups accumulated savings, they may borrow from a bank or other organization, such as a microfinance non-government organization, to augment their own fund. The system is very flexible. The group aggregates the small individual saving and borrowing requirements of its members, and the bank needs only to maintain one account for the group as a single entity. The banker must assess the competence and integrity of the group as a microbank, but once he has done this he need not concern himself with the individual loans made by the group to its members, or the uses to which these loans are put. He can treat the group as a single customer, whose total business and transactions are probably similar in amount to the average for his normal customers, because they represent the combined banking business of some twenty micro-customers. Any bank branch can have a small or a large number of such accounts, without having to change its methods of operation. Unlike many customers, demand from SHGs is not price-sensitive. Illiterate village women are sometimes better bankers than some with more professional qualifications. They know that rapid access to funds is more important than their cost, and they also know, even though they might not be able to calculate the figures, that the typical micro-enterprise earns well over 500% return on the small sum invested in it (Harper, M, 1997, p. 15). The groups thus charge themselves high rates of interest; they are happy to take advantage of the generous spread that the NABARD subsidized bank lending rate of 12% allows them, but they are also willing to borrow from NGO/MFIs which on-lend funds from SIDBI at 15%, or from new generation institutions such as Basix Finance at 18.5% or 21%. SHGs-Bank Linkage Model NABARD is presently operating three models of linkage of banks with SHGs and NGOs: Model 1: In this model, the bank itself acts as a Self Help Group Promoting Institution (SHPI). It takes initiatives in forming the groups, nurtures them over a period of time and then provides credit to them after satisfying itself about their maturity to absorb credit. About 16% of SHGs and 13% of loan amounts are using this model (as of March 2002).
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Model 2: In this model, groups are formed by NGOs (in most of the cases) or by government agencies. The groups are nurtured and trained by these agencies. The bank then provides credit directly to the SHGs, after observing their operations and maturity to absorb credit. While the bank provides loans to the groups directly, the facilitating agencies continue their interactions with the SHGs. Most linkage experiences begin with this model with NGOs playing a major role. This model has also been popular and more acceptable to banks, as some of the difficult functions of social dynamics are externalized. About 75% of SHGs and 78% of loan amounts are using this model. Model 3: Due to various reasons, banks in some areas are not in a position to even finance SHGs promoted and nurtured by other agencies. In such cases, the NGOs act as both facilitators and micro- finance intermediaries. First, they promote the groups, nurture and train them and then approach banks for bulk loans for on-lending to the SHGs. About 9% of SHGs and 13% of loan amounts are using this model. Life insurances for self-help group members The United India Insurance Company has designed two PLLIs (personal line life insurances) for women in rural areas. The company will be targeting self-help groups, of which there are around 200,000 in the country, with 15-20 women in a group. The two policies are (1) the Mother Teresa Women & Children Policy, with the aim of giving to the woman in the event of accidental death of her husband and to support her minor children in the event of her death, and (2) The Unimicro Health Scheme, giving personal accident and hospitalization covers besides cover for damage to dwelling due to fire and allied perils. Microfinance Models 1. Microfinance Institutions (MFIs): MFIs are an extremely heterogeneous group comprising NBFCs, societies, trusts and cooperatives. They are provided financial support from external donors and apex institutions including the Rashtriya Mahila Kosh (RMK), SIDBI Foundation for micro-credit and NABARD and employ a variety of ways for credit delivery.

Since 2000, commercial banks including Regional Rural Banks have been providing funds to MFIs for on lending to poor clients. Though initially, only a handful of NGOs were into
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financial intermediation using a variety of delivery methods, their numbers have increased considerably today. While there is no published data on private MFIs operating in the country, the number of MFIs is estimated to be around 800.

Legal Forms of MFIs in India Types of MFIs Estimated Number* 1. Not for Profit MFIs a.) NGO - MFIs 400 to 500 Societies Registration Act, 1860 or similar Provincial Acts Legal Acts under which Registered

Indian Trust Act, 1882 10 MFIs 200 to 250 Section 25 of the Companies Act, 1956 Mutually Aided Cooperative Societies Act enacted by State Government

b.) Non-profit Companies 2. Mutual Benefit

a.) Mutually Aided Cooperative Societies (MACS) and similarly set up institutions 3. For Profit MFIs a.) Non-Banking Financial 6

Indian Companies Act, 1956 Reserve Bank of India Act, 1934

Companies (NBFCs) Total 700 - 800

2. Bank Partnership Model This model is an innovative way of financing MFIs. The bank is the lender and the MFI acts as an agent for handling items of work relating to credit monitoring, supervision and recovery. In other words, the MFI acts as an agent and takes care of all relationships with the client, from first contact to final repayment. The model has the potential to significantly increase the amount of funding that MFIs can leverage on a relatively small equity base.

A sub - variation of this model is where the MFI, as an NBFC, holds the individual loans on its books for a while before securitizing them and selling them to the bank. Such refinancing through securitization enables the MFI enlarged funding access. If the MFI fulfils the true
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sale criteria, the exposure of the bank is treated as being to the individual borrower and the prudential exposure norms do not then inhibit such funding of MFIs by commercial banks through the securitization structure.

3. Banking Correspondents The proposal of banking correspondents could take this model a step further extending it to savings. It would allow MFIs to collect savings deposits from the poor on behalf of the bank. It would use the ability of the MFI to get close to poor clients while relying on the financial strength of the bank to safeguard the deposits. This regulation evolved at a time when there were genuine fears that fly-by-night agents purporting to act on behalf of banks in which the people have confidence could mobilize savings of gullible public and then vanish with them. It remains to be seen whether the mechanics of such relationships can be worked out in a way that minimizes the risk of misuse.

4. Service Company Model Under this model, the bank forms its own MFI, perhaps as an NBFC, and then works hand in hand with that MFI to extend loans and other services. On paper, the model is similar to the partnership model: the MFI originates the loans and the bank books them. But in fact, this model has two very different and interesting operational features:

(a) The MFI uses the branch network of the bank as its outlets to reach clients. This allows the client to be reached at lower cost than in the case of a standalone MFI. In case of banks which have large branch networks, it also allows rapid scale up. In the partnership model, MFIs may contract with many banks in an arms length relationship. In the service company model, the MFI works specifically for the bank and develops an intensive operational cooperation between them to their mutual advantage.

(b) The Partnership model uses both the financial and infrastructure strength of the bank to create lower cost and faster growth. The Service Company Model has the potential to take the burden of overseeing microfinance operations off the management of the bank and put it in the hands of MFI managers who are focused on microfinance to introduce additional products, such as individual loans for SHG graduates, remittances and so on without disrupting bank operations and provide a more advantageous cost structure for microfinance.
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THE LIST OF MICRO-FINANCE INSTITUTIONS IN INDIA

Asmitha Provides rural poor women access to financial resources in the form of collateral free small loans for income generation and livelihood promotion. This enables them to set-off small start up business, which soon translates into adequate nutrition, medical aid and education. With increased businesses, these low-income women become economic agents intrinsic to development rather than simply homemakers Bandhan MF- Bandhan was set up to address the dual objective of poverty alleviation and women empowerment. The microfinance activities are carried on by Bandhan Financial Services Pvt. Ltd. (BFSPL), incorporated under the Companies Act, 1956 and also registered as a Non Banking Financial Company (NBFC) with the Reserve Bank of India (RBI).That apart, Bandhan is also engaged in development work through its not for profit entity. Basix BASIX is a livelihood promotion institution established in 1996, working with over a 3.5 million customers, over 90% being rural poor households and about 10% urban slum dwellers. BASIX operates in 17 states - Andhra Pradesh, Karnataka, Orissa, Jharkhand, Maharashtra, Madhya Pradesh, Tamil nadu, Rajasthan, Bihar, Chhattisgarh, West Bengal, Delhi, Uttarakhand, Sikkim, Meghalaya, Assam and Gujarat, 223 districts and over 39,251 villages. It has a staff of over 10,000 of which 80 percent are based in small towns and villages.

BASIX mission is to promote a large number of sustainable livelihoods, including for the rural poor and women, through the provision of financial services and technical assistance in an integrated manner. BASIX strategy is to provide a comprehensive set of livelihood promotion services which include Financial Inclusion Services (FINS), Agricultural / Business Development Services (Ag/BDS) and Institutional Development Services (IDS) to rural poor households under one umbrella. Cashpor India Our mission is to identify and motivate poor women in the rural areas and to deliver financial services to them in an honest, timely and efficient manner so that our Vision is realized and CASHPOR itself becomes a financially sustainable microfinance institution for the poor. Grameen Foundation Works in 6 key areas: Connecting microfinance institutions with capital markets, strengthening organizations by building people practices, harnessing the power

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of technology, helping track peoples movement out of poverty, sharing knowledge widely for broader impact and Social Business Grameen Koota Grameen Koota recognises the future competition and challenge of retaining exclusivity of clients. Instead of targeting a high market share in high competition areas we will focus on increasing the mind share amongst client and becoming a preferred microfinance provider. We will leverage our existing goodwill with the community and have a strong focus on orienting our field staff towards this objective. Hand in Hand is a development organisation whose objective is to eliminate poverty by creating enterprises and jobs. Focusing on help to self-help, we take a holistic approach that combines microfinance and support for women to start enterprises with work in four other areas that matter most to poor communities: education and child labour elimination, health and sanitation, a sustainable local environment and information technology access. With currently more than 450,000 members in Tamil Nadu, Karnataka and Madhya Pradesh, who have collectively started more than 250,000 micro-enterprises, our goal is to create 1.3 million jobs by 2013. Supported by international offices in the UK and Sweden, we are now taking our model to South Africa, Afghanistan and Latin America. Micro Credit India Microcredit Foundation of India (MFI) is a not-for-profit Section 25 Company in Tamil Nadu dedicated to promoting entrepreneurship and community level action in rural areas as a means to sustainable economic prosperity. Today MFI works primarily with women. Through its field staff, MFI helps them form Self Help Groups (SHGs), trains them in good financial practice, facilitates access to microcredit loans, equips them with business skills and facilitates access to new markets for their products. MYRADA MYRADA is a Non Governmental Organisation managing rural development programmes in 3 States of South India and providing on-going support including deputations of staff to programmes in 6 other States. It also promotes the Self Help Affinity strategy in Cambodia, Myanmar and Bangladesh New Life New Life designs projects based on survey of the socioeconomic problems of the project area and support the poor, abused and abandoned children and women by executing the projects with a defined goals/objectives. The current projects of New Life includes orphanages for children of incarcerated parents, Save children from Child Labour, Ensuring primary education for the rural children in India, Early learning centres for children of vulnerable
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community groups, Read to Lead Project, Taking care of the medical needs of Physically handicapped and Mentally retarded children. RangDe Rang Des mission is to make microcredit accessible to every low income household by lowering loan interest rates through innovative means. Rang De is committed to enabling individuals to become social investors through a transparent platform. While strive to improve Rangde.org as an interface, we work extensively with our field partners to ensure that we do not compromise on our vision making credit available at affordable rates. Saadhana SAADHANA is a non- profit organization established in the year 2001 to reach out to the urban and rural poor women with the specific mandate to catalyze the Endeavour of the Poor for Self-Sufficiency. Samrudhi SAMRUDHIs mission is to empower the poor and underprivileged to become economically self-reliant by providing cost effective and need based financial services in a financially sustainable manner. SHARE Micro fin Limited - (SHARE) is a regulated Non-Banking Financial Company (NBFC) providing financial and support services to the marginalised sections in society, particularly to poor rural and urban women across India. Through its income generating loans and business development services, SHARE reaches out to help these women build productive microenterprises, thereby contributing to the development of sustainable communities. SKS India Launched in 1998, SKS Microfinance is one of the fastest growing microfinance organizations in the world, having provided over US $ 1.8 Billion (9,129 Crore) and has maintained loans outstanding of US $ 605 Million (Rs.2937 Crore) in loans to 5,013,219 women members in poor regions of India. Borrowers take loans for a range of incomegenerating activities, including livestock, agriculture, trade (such as vegetable vending), production (from basket weaving to pottery) and new age businesses (Beauty Parlour to photography). SKS also offers interest-free loans for emergencies as well as life insurance to its members. Its NGO wing SKS foundation runs the Ultra Poor Program. SKS currently has microfinance branches in 19 states across India. SKS aims to reach members 15 million by 2012. In the last year alone, SKS Microfinance has achieved nearly 170 % growth, with 99% on-time repayment rate.

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Unitus Unitus, an international nonprofit organization, fights global poverty by accelerating the growth of microfinancesmall loans and other financial tools for self-empowerment where it is needed most. Whole Planet Foundation Whole Planet Foundation, a private, nonprofit organization established by Whole Foods Market, provides grants to microfinance institutions in Latin America, Africa and Asia who in turn develop and offer microenterprise loan programs, training and other financial services to the self-employed poor.

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OPPORTUNITIES FOR MICROFINNACING

The Government has indicated its willingness to speed up the pace of structural reforms to meet the major challenges of
o

REDUCING POVERTY: The basic motto of the government to eliminate the poverty and bring prosperity in the

country. MFI providing small loans and other credit facilities to the poor and low-income groups; which are beginning positive changing like their standard of living group and earning have increased
o

IMPROVING SOCIAL INDICATORS: Inadequate access to productive resources and social services has resulted low social indicators and low employment opportunities. This situation is compounded in rural areas; where access is more difficult. So, by providing small loans and credit facilities they can over come this issue and can improve social indicators.

IMPROVING THE FISCAL AND BALANCE OF PAYMENTS POSITIONS: Pakistan is a poor country whose balance of payment always in deficit, because of low

productivity, lack of resources and lack of productive mens power. If MIF provide loans new business can be established. And export of Pakistan can be improved which create balance of payments.
o

RESTORING INVESTOR CONFIEDENCE: Due to poor economy of Pakistan investors are hesitating to invest their money in Pakistan but MFIs can boost up. Because provide loans to local people new business will stable. Economy will go up and this situation may motivate to them for investing their funds.

ACHIEVING HIGHER GROWTH ON A SUSTAINABLE BASIS Another objective of MFI is that to achieve high development and bring innovation in

the economy, which improve GDP of the country and give sustained to the economy.

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SKS MICROFINANCE
About the company

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Microfinance is an effective tool that can help reduce poverty and spread economic opportunity by giving poor people access to financial services, such as credit and insurance. SKS distributes small loans that begin at Rs. 2,000 to Rs. 12,000 (about $44-$260) to poor women so they can start and expand simple businesses and increase their incomes. Their micro-enterprises range from raising cows and goats in order to sell their milk; to opening a village tea stall.SKS uses the group lending model where poor women guarantee each others loans. Borrowers undergo financial literacy training and must pass a test before they are allowed to take out loans. Weekly meetings with borrowers follow a highly disciplined approach. Re-payment rates on our collateral-free loans are more than 99% because of this systematic process. SKS also offers micro-insurance to the poor as well as financing for other goods and services that can help them combat poverty. Operational Information for FY 10 Total no. of Branches - 2029 Total no. of Districts - 341 Total no. of Staff - 21,154 Total No. of Members (in '000) - 6,780 Amount Disbursed for the period (INR crores) - 7,618 Portfolio outstanding (INR crores) - 4,321

SKS APPROACH SKS believes that access to basic financial services can significantly augment economic opportunities for poor families and in turn help improve their lives. SKS is committed to creating a distribution network across underserved sections of society in order to provide easy access to the full portfolio of microfinance products and services. It also looks at using this network to add value to the lives of its members by providing quality goods and services that our members need at less than market rates.

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WORKING MODEL SKS Microfinance follows the Joint Liability group Model. The methodology involves lending to individual women, utilising five member groups where groups serve as the ultimate guarantor for each member. Our approach is to provide financial services at the doorstep of members in villages and urban colonies. This allows the poor convenience and savings in terms of cost and time associated with travelling to mainstream banks and enables SKS staff to promptly and fully collect repayments. Our loans are designed for convenience with small weekly repayments corresponding to cash flows. Small first loans inculcate credit discipline and collective responsibility. Interest and loan repayments are simplified for easy comprehension. From village selection to loan disbursal, SKS follows a clear process in its operations. Details of our operational methodology are captured below: Village Selection: Before starting operations, our staff conducts village surveys to evaluate local conditions like population, poverty level, road accessibility, political stability and means of livelihood. Projection Meeting: After a village is selected, SKS staff introduces the community to its mission, methodology and services.

Mini-Projection Meeting: Follow-up with interested women, and direct appeal to those who may not have attended earlier because of religious, class, caste or gender barriers.

Group Formation: Women form self-selected five-member groups to serve as guarantors for each other. Experience has shown that a five-member group is small enough to effectively enforce group peer pressure and, if necessary, large enough to cover repayments in case a member needs assistance.

Compulsory Group Training: CGT is a four-day process consisting of hour-long sessions designed to educate clients on SKS processes and procedures and to also build a culture of credit discipline. Using innovative visual and participatory teaching methods, SKS staff introduces clients to our financial products and delivery methods. CGT also teaches clients the
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importance of collective responsibility, how to elect group leaders, how to affix signatures, and a pledge that serves as a verbal contract between SKS and its members. During this training period, SKS staff collects quantitative data on each client to ensure qualification requirements are met, as well as to record base-line information for future analysis. On the fourth day, clients take a Group Recognition Test conducted by a different staff member than the one who trained them. If they pass, they are officially accepted as SKS members. Centre Meeting: As additional groups are formed within a single village, a Centre (sangam) emerges. During Centre Formation, groups are combined to form a centre of 3 to 10 groups or 15 to 50 members. Weekly Centre meetings serve as a time to conduct financial transactions. Meetings are held early in the morning, so as to not interfere with clients daily activities. A leader and deputy leader are selected to facilitate meetings and ensure compliance with SKS procedures. In addition to financial transactions, members use the weekly meetings to discuss new loan applications and community issues. Centre meetings are conducted with rigid discipline in order to sustain the environment of credit discipline created during CGT.

PRODUCTS OFFERED: Product Income Generation Features Benefits

Loans range from Rs. 4,000 to Rs. 10,000 Provides self-employed women for the first loan; subsequent loan amounts financial assistance to support

Loans (IGL) - determined by past credit history and their business enterprises, such as Aarambh increased each in set increments up to a raising livestock, running local maximum of Rs. 26,000 retail shops called kirana stores, providing tailoring and other

Term of the loan is 50 weeks with assorted trades and services principal and interest payments due on a weekly basis 12.5% flat interest rate / 24.55% annual effective interest rate

Mid-Term

Loan amounts range from Rs. 2,000 to Rs. Provides self-employed women in each annual cycle. financial assistance to support
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Loan (MTL) - 14,000

Vriddhi

their business enterprises, such as Available any time after the completion of raising livestock, running local 20 weeks & before 40 weeks of an IGL retail shops called kirana stores, cycle providing tailoring and other

assorted trades and services Term of the loan is 50 weeks with principal and interest payments due on a weekly basis12.5% flat interest rate / 24.55% annual effective interest rate

Emergency Loans Advances Raksha

Interest free emergency loans range from Designed to meet the unforeseen and Rs. Term of the loan is 20 weeks with a bullet repayment Disbursed within 24 hours of request Interest free funeral advances of Rs. 1,000 adjusted out of the claim settlement of loan Funeral cover insurance advance paid to a members family upon the death of the member or her spouse 500 to Rs. 2,000 emergency members requirements of

Life Insurance Interest Loans

free

loans

of

Rs.

500 Issued to members to pay their life insurance premiums during the

Term of 25 weeks with principal repaid initial weekly

25

week

period

Helps to promote habit of savings and reduction of vulnerability among members Mobile Loans Financing of mobile phones and telephone Provides financing for mobile services phones and telephone services to our members Loan amounts range from Rs. 1,500 to Rs. 3,000

26.14% annual effective interest rate and

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loan

processing

fee

of

1%

Term of 25 weeks Sangam Store Working capital loans ranging from Rs. Provides a working capital loan to Loans 1,000 to Rs. 12,500 fund the needs of our members who own and operate kirana stores Interest free The Term of the loan is 14 days program to allows purchase these their

members

inventory of consumer goods and groceries from a national

wholesaler at wholesale prices Housing Loans Loans range from Rs. 50,000 to Rs. Provides 150,000 financial access to

women for construction of new houses or improvement &

Members must have completed at least 3 extension of existing houses IGL cycles to qualify or one ILP to be completed

Term of loan is 3 to 5 years with principal and interest payments due on a monthly basis

11.9% flat interest rate, 21% annual effective interest rate. In addition, loan processing fee of 2% collected upfront As Per RBI circular DNBS. 204/CGM (ASR)-2009 dated January 2, 2009, SKSs Board of Directors has discussed and formally adopted an interest model based on cost of funds, operational costs, and risks involved for each product.

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Product Life Insurance

Features

Benefits

Weekly payment of Upon death, we disburse to the beneficiary the full Rs. 20 for the term sum assured of Rs. 5,000 plus the account value, of five years which is equal to the aggregate of the premiums paid plus interest accrued, if any, less any charges for the administration of the policy

In the event the death is deemed an accidental death, the beneficiary receives Rs. 10,000 plus the account value

Upon maturity in five years where no death has occurred, we disburse to the policyholder the account value.

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NEW INITIATIVE
Sangam Store Loans : The Sangam Stores project is aimed at providing working capital finance to SKS members who own small kirana stores. With credit supplied by SKS, shopkeepers can buy consumer goods and groceries through a dedicated third-party vendor. This relationship gives access to quality products at competitive prices that are delivered straight to their shops. Our members save time and transport costs normally spent on buying goods from local markets. SKS is partnering with Metro, the German wholesaler, which supplies member kiranas from a special inventory of 250 SKUs. Under this project, SKS generates and aggregates demand from kirana store owners, in addition to supplying credit to them. This pilot is the first step towards creating a vibrant distribution network across sections of society currently not serviced by manufacturers.

Housing: Many SKS members have asked for larger loans to make improvements on their homes or build new ones. SKS has launched a housing loan pilot for members who have been with SKS for a minimum of three years. Members can repair their houses, such as changing a thatched or asbestos roof to RCC, or make improvements such as building a latrine or adding an extra room. The loan has a repayment period of three to five years as per the repayment capacity of the members. SKS is currently carrying out a pilot programme in rural markets with support from HDFC and hopes to roll out housing loans more widely in the next financial year.

Water Purifier: SKS has partnered with Hindustan Unilever to provide Pureit water filter devices to our members. SKS provides the loan to make the water filter affordable and HUL provides the distribution, installation, and servicing that ensures our members have access to clean water. SKS is currently assessing the learning from our pilot branches and will determine a rollout plan to reach our members pan-India in the coming months.

Solar Lamp: Most of our members live in areas that have erratic power supply forcing business and normal lifestyle to come to a halt with sunset. Solar-powered lighting gives our members the opportunity to be independent from unreliable, low-voltage electricity grids or to light their homes if theirs are currently un-electrified. After completing a successful pilot SKS is currently evaluating the learnings from the project.
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ISSUES WITH MICROFINANCE INDUSTRY RELATED TO SKS MICROFINANCE CASE STUDY Andhra Pradesh, one of Indias most populous states, cracked down heavily on private microfinance institutions (PMFIs), banning many of their activities and telling borrowers they did not need to repay their loans. State authorities said they were prompted to take decisive action by a spate of suicides by borrowers who were unable to pay their debts. Roughly 80 clients were reported to have taken their own lives last year an alarming figure, though tiny relative to the 26.7 million active borrowers from PMFIs in India. Andhra Pradesh officials charged that PMFIs, which had lent around 80 billion rupees (nearly $2 billion) in the state, levy usurious interest rates (24-30% per year) to sustain their promoters extravagant salaries and profits. In addition, too many borrowers had taken multiple loans from different sources and were unable to repay them. Aggressive agents were marketing the loans with no heed to borrowers capacity to repay. It was alleged, too, that coercion was being used to exact repayment, leaving victims with no way out but to end their own lives. One institution that received unwelcome attention was SKS Microfinance, once a poster child for the PMFIs, which had done so well and grown so large that its initial public offering last year was oversubscribed 13-fold and raised $350 million. The salaries paid to its top executives as a reward, essentially, for lending successfully to the poorest of the poor were excoriated by leaders across Indias political spectrum. SKS Chairman, Vikram Akula, reportedly made $13 million by selling some of his shares last year. Is it moral, critics asked, to profit so much from providing services that alleviate poverty?

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ANDHRA PRADESH ORDINANCE

The Andhra Pradesh Microfinance Institutions Ordinance 2010 was issued by the Andhra Pradesh government in the wake of a series of suicide cases in the state that were blamed upon the MFIs who are charging high interest rates and using coercive recovery methods. It was reported that the deaths have kicked up a furore with opposition parties and the State Human Rights Commission demanding action from the government. The ordinance talks about following main items:

Registration of MFIs Register of MFIs Member of SHG not to be member of more than one SHG MFIs not to seek security for loan Display of interest rates charged by MFIs Maximum amount of interest recoverable on loans discharged Prior approval for grant of further loans to SHGs or their members Duty of MFIs to maintain accounts and furnish copies Submission of monthly statements by MFIs Power to require production of records or documents and power of entry, inspection and seizure

Complaints Settlement of disputes procedure Penalty for coercive actions by MFIs

Under the ordinance, all MFIs operating within the states have to apply for registration with the registering authority of the district within 30 days of issue of ordinance thereby giving details like the purpose of operating, the interest rate charged, system of conducting due diligence and effecting recovery and the list of persons authorized for lending or recovery of money. Registering authorities include Project Director District Rural Development Agency for the rural areas and Project Director MEPMA (Mission for Elimination of Poverty in Municipal Areas) for urban areas. Microfinance institutions are further barred from granting or recovering loans without obtaining registration under this ordinance. The registering authority can anytime cancel the registration of an MFI after assigning sufficient reasons for such cancellation.
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The Ordinance prohibits members of SHG from holding memberships of more than one SHG. For those who already have more than one membership, the option of retaining the membership of one SHG and terminating membership in other SHGs is given. The member has to issue a notice about her termination and settle the amount payable to such MFIs. With the ordinance in place, no MFI can recover from the borrower an interest which is in excess of the principal amount and all loans for which an MFI has realized from the borrower an amount equal to twice the amount of the principal shall be discharged. The borrowers shall be entitled to obtain refund form the MFI. The ordinance also made it mandatory for MFIs to make public the rates of interest charged by them. Moreover, MFIs are now barred from extending further loans to an SHG or to its members which already has an outstanding loan from a Bank unless the MFIs obtain prior approvals from the registering authority. For putting a check on the increasing use of coercive methods by MFIs for recovering repayments, the ordinance says that MFIs shall not deploy any agents for recovery nor shall use any coercive action for recovering money from the borrowers. It empowers the registering authority to suspend or cancel the license of MFIs found engaged in coercive methods. Further, the registering authority has also been given the power to require production of records, inspection and seizure for examination and legal actions. MFIs are also required to submit monthly statements to the registering authority. The ordinance also empowers SHGs and their members to file a complaint regarding violation of the stated provisions by an MFI before the registering authority. The State government will also be establishing fast-track courts for settlings disputes of MFIs and SHGs. It is also reported that SHGs were expected to get further relief as the soft loans being arranged to them from banks under debt swap scheme, to clear the MFI loans, would be charged only 3 per cent. The government would bear 10% out of the 13% interest charged by the banks on these loans.

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MALEGAM COMMITTEE RECOMMENDATIONS

In a bid to revive the sagging prospects of the microfinance industry, Malegam committee set up by Reserve Bank of India has recommended earmarking a maximum interest rate of 24% on small loans to individuals with a tagged ceiling of Rs.25000 to a single borrower. The sub-committee has recommended creation of a separate category of NBFC, to be classified as NBFC-MFI a lender which will provide financial services predominantly to low-income borrowers and holds no less than 90% of its total assets in the form of qualifying assets. Further, any bank lending to such NBFCs for the microfinance sector will be entitled to priority lending status. The panel provides that no less than 75% of the loans by an MFI should be for incomegenerating purposes. The committee has taken a strict cognizance of the fact that a number of individuals have taken multiple loans from various lenders of micro-credit loans. For such cases, it has marked a cap on individuals in allowing them to borrow money from not more than 2 MFIs. The best part of the Malegam committee report being NBFC-MFIs should be exempted from state Money Lending Acts. This essentially means that MFIs would be freed from the clutches of draconian the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Act, 2010, which has already reduced interest rate to 24% for the industry. Highlights of Malegam Committee Report:

Categorizing MFIs under NBFC-MFIs Ceiling on loans to a single borrower of Rs.25000 Not more than 2 MFIs can lend to a single borrower A borrower can be a member of Self-Help Group. NBFC-MFIs to be exempted from state Money Lending Acts. BFC-MFIs to will be entitled to priority lending status.

However, the above recommendation is yet only in the public domain. It needs to be accepted before being regularized. Some sector analysts are of the opinion that the new recommendations might not go down too well with the smaller MFIs on account of margin squeeze. But, overall the panel report is positive and a first step towards right direction which soothes investor concerns with respect to the sector prospects.
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CHALLENGES FOR MICROFINANCE PROVIDERS

Although the importance of microfinance in the process of poverty eradication is realized, it faces multiple problems. This is because offering credit to the poor is a complicated process and the sector is still in its experimental stage. Weve divided all problems into two sets; challenges faced by MFIs and challenges faced by micro entrepreneurs Microfinance Challenge 1: Perceived High Risk of Micro Entrepreneurship and Small Businesses Micro entrepreneurs usually have no collateral to offer to microfinance providers against loans, they usually lack an alternate source of income, and have little, if any, formal education or training in the area of their business. As a result, commercial banks attribute a high credit risk to micro entrepreneurs and steer clear of this sector. Microfinance institutes (MFIs) are compelled to compensate for this risk by charging interest rates on loans. Fortunately, the challenge can be resolved through the idea of group lending (social collateral against loans) which ensures good repayment rates. Microfinance Challenge 2: High Costs Involved in Small Transactions/Micro lending The small size of micro enterprises increases the transaction cost for MFIs because they cannot process loans in bulk (unless good management information systems are in place). This denies MFIs the benefit of economies of scale; hence, they are forced to cover their costs through high interest rates on loans (read 4 ways to control high interest rates). According to a study conducted by Asian Development Bank, microfinance providers in the Asia-Pacific region charge interest rates on micro-sized loans ranging from 30 to 70% a year, which is much higher than rates offered by commercial banks (Fernando, 2006). However, there are instances where the interest rates charged were too low for the MFIs sustainability. There is, however, possible solutions to this problem by improving the technology model used by microfinance institutes, their operational costs can be significantly lowered and efficiencies may be gained during automated loan processing.

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Microfinance Challenge 3: Lack of Debt and Equity Funds for MFIs to Pass on to the Poor Capital availability for microfinance is hardly a problem owing to the rapid growth in the microfinance sector, which has been fuelled by attention from the media and development agencies. Even though there are plenty of financing options available for MFIs, there is an emerging shortage of money because of the current financial crisis across the globe. Another reason for this shortfall is the lack of awareness of funding sources by MFI managers. Microfinance Challenge 4: Difficulty in Measuring the Social Performance of MFIs Microfinance is delivering the economic returns its proponents promised, but there are only a handful of tools available that measure the social return of loan programs for the poor. To add to the problem, the tools use proxies to estimate the amount of poverty and social change surrounding micro entrepreneurs. This makes the gathering of funds a challenge because donors may question the actual impact made my microfinance. Microfinance Challenge 5: Mixing Charity with Business Since credit without strict discipline is nothing but charity (Professor Yunus), if microfinance providers fail to protect themselves against loan delinquency, they will, in effect, prioritize social objectives at the expense of financial sustainability. Improper delinquency management is a result of inadequate implementation of corporate governance principles, and formal as well as semi-formal microfinance providers often suffer from this. As a result, looser controls over microfinance deals will lead to higher default rates. Read more about the difficulty immixing. Microfinance Challenge 6: Lack of Customized Solutions for the Poor Inappropriate targeting of poor households by microfinance programs is a common problem because MFIs fail to understand the varied needs of micro entrepreneurs. MFIs must spend time in the field with their clients and his/her business, and then use this research to develop customized microfinance tools for each micro entrepreneur. Generalized solutions may work for large companies dealing with large homogeneous customer groups, but microfinance providers need to serve the varied needs of individuals in each micro market segments.
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Microfinance Challenge 7: Lack of microfinance training for Human Resource in Microfinance Institutions Working in the microfinance sector is a different ball game compared to the traditional financial sector. For instance, microfinance officers and volunteers need to talk a different language, build lasting relationships with individual micro entrepreneurs, understand the unique needs of the poor, evaluate the borrowers sustainability, and grasp the cultural nuances of the borrowers communities (Im sure Ive missed a few). Of course, all this needs to be done by large financial firms as well, but the needs and characteristics of the two markets are very different. Its no surprise microfinance providers need special training to ensure they avoid problems such as intimidating or under-serving clients. Microfinance Challenge 8: Poor Distribution System of Microfinance Institutions and lack of information about microfinance investment opportunities There are over 10,000 MFIs across the world, but their reach is only 4% of the potential market. World Bank, 2001 Firstly, microfinance providers may be complacent with their client base in certain cities and feel no economic need (ignoring the social need to eradicate poverty) to spread out their distribution system to cater to the poorest of households. Secondly, micro entrepreneurs are sprawled over large geographical areas, often in remote places, which often make them inaccessible to MFIs. This is a slight problem because even though there are over 10,000 MFIs around the world, they may not know about the existence and needs of certain micro entrepreneurs. Microfinance Challenge 9: Dual mission of Microfinance Institutions to be financially Sustainable as well as Development Oriented Microfinance providers tend to forget their main objective is social development and not profit creation. The principle of one micro entrepreneur one micro loan is overlooked by profithungry MFIs who end up targeting the same individual for many loans and cause multiple borrowing (also known as credit pollution). This is a major problem because at the end of the day, that individual gets burdened by mounting interest payments and is pushed deeper into the

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folds of poverty. Poor governance on the side of MFIs as well as the micro entrepreneur are to blame for this. All these problems can broadly fall into either financial or operational in nature and we can therefore see that they should not be impossible to solve as the microfinance sector moves towards it optimal performance level in the next several years. In other words, despite these problems, the prospects of microfinance are quite bright. In the coming weeks, we will look at potential solutions to all these problems, which arent difficult to adopt (a couple have been already been mentioned above). Microfinance Challenge 10: Micro insurance A big issue in the micro insurance sector is developing products that really respond to the needs of clients and in a way that is commercially viable. People either have no information about micro insurance or they have a negative attitude towards it. We have to counter that. We have to somehow get people - without having to sit down at a table - to understand what insurance is, and why it benefits them. That will help to demystify micro insurance so that when agents come, people are willing to engage with them. Microfinance Challenge 11: Adverse selection and moral hazard The joint liability mechanism has been relied upon to overcome the twin issues of adverse selection and moral hazard. The group lending models are contingent on the availability of skilled resources for group promotion and entail a gestation period of six months to one year. However, there is not sufficient understanding of the drivers of default and credit risk at the level of the individual. This has constrained the development of individual models of microfinance. The group model was an innovation to overcome the specific issue of the quality of the portfolio, given the inability of the poor to offer collateral. However, from the perspective of scaling up micro financial services, it is important to proactively discover models that will enable direct finance to individuals.

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THE FALL OF MICROFINANCE

Even though a confluence of recent unfortunate incidents has caused the current situation, a crisis has been brewing for a while in the microfinance industry. This crisis bears an uncanny resemblance to the sub-prime debacle that rocked the US just recently. In the past 5 years, the nature of microfinance in India has been undergoing a drastic change. The fundamental twin pillars on which microfinance was built - income generation (which would enable borrowers to repay loans of 30% interest) and social capital (encouraging repayment through self-help groups or SHGs) were undermined as microfinance institutions (MFIs) chased growth. In their zeal to grow and generate ever more profits, MFIs began taking in larger and larger amounts of commercial capital (e.g. SKS Microfinance was funded by Sequoia capital and went public earlier this year at its peak, the company was valued at US$2 billion) and began disbursing more/larger loans to existing clients and moved beyond households with predictable cash flows to targeting those relying on uncertain daily cash flows. MFIs began to define their role as credit delivery institutions and focused on standardizing products and delivery processes to achieve scale more rapidly. They left income generation and social capital to SHGs and the government the relationship of MFIs with their clients became increasingly transactional. The effective interest rates of 40%-60% of many MFIs did not help the situation.

This situation was particularly exacerbated in the state of Andhra Pradesh (AP) which is why the crisis first hit this state. In 2009, Andhra Pradesh accounted for close to a third of all microfinance loans extended in India, the average loan outstanding per poor household was US $1,140 and the penetration of microfinance loans amongst poor households was a whopping 823%! I.e. assuming only poor households were availing of these loans; each poor household was servicing more than 8 loans!! This fact notwithstanding, MFI lending in Andhra Pradesh close to doubled from ~US$1 billion in 2009 to ~US$2 billion this year. Most of these loans were being used by borrowers to buy consumables like appliances (TV, refrigerators) and vehicles (motorbikes etc) that would have normally been beyond their capacity to afford and not for income generation. Compounding this was the fact that the vast majority of the poor in the state, especially inland, relied on non-farm based manual labour for their income. In the last 4 months, heavy rains caused demand for manual labour to plummet and many found themselves unable to meet repayment obligations. The resulting pressure from their MFIs and SHGs, precipitated in a spate of suicides. This was when the government stepped in.
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THE FUTURE
The future of microfinance in India is uncertain. It could be that it continues but becomes more highly regulated. It could also be that alternative models like the government-introduced Business Correspondent model, becomes the preferred model. Whatever the end scenario, there is no doubt that it will look fundamentally different from how it does today. If MFIs continue to exist, it is likely that they will need to go back to including a strong income generation model. While some microfinance borrowers might be inherently more entrepreneurial and able to use the money to generate higher incomes, experts feel that for the microfinance model to be generally applied to the vast majority of the countrys poor (many of whom live in areas where potential for income generation activities are more limited or face systemic challenges like lack of access to market information or lack of access to know-how and expertise to increase yields) as a poverty alleviation tool, it will need to be based on livelihood capacity building with microfinance weaved in as part of it. Measurement of social impact around income generation and poverty alleviation needs to be an integral part of microfinance going forward.

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RESEARCH METHODOLOGY

LIMITATIONS OF THE STUDY

Time is the major constraint in doing project as I have to complete project in short period of time. The project report is based on the secondary data collection, I have tried to search the best data but there are chances that data collected may not be up to the mark.

DATA COLLECTION METHOD

There are two types of data collection: Primary data Secondary data For my project I m going to use secondary data collection method.

Secondary data are those which have already been collected by someone else and which have already been passed through the stratified process. It has collected through the books, journals & Internet.

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DATA ANALYSIS AND INTERPRETATION (Qualitative)

Microfinance is an economic development tool whose objective is to assist the poor to work their way out of poverty. It covers a range of services which include, in addition to the provision of credit, many other services such as savings, insurance, money transfers, counselling, etc. Organisations operate with a motive of earning profit and it is this motive that has been misunderstood or has created a negative impact about microfinance institutions in India. No doubt the concept of microfinance was a noble one but somehow the industry is failing to live up to expectations. Microfinance institutions are essentially money lenders and with this objective in mind it is not wrong for a microfinance institution to make profits. In fact when poor people are faced with problems they rush to the money lenders for help, but problems necessarily do not mean trouble at all times, poor people place importance on social aspects which includes occasions like shradh, mundane etc. This is where microfinance comes into play where a formal banking system fails, to the extent micro-finance meets the same kind of needs, its place can never be taken by the formal banking system either. But the main problem arises where MFIs have been criticised for charging exorbitant rates of interest which ranges anywhere between 20% to 40%. In the name of empowering the poor, this form of organized exploitation has given many reasons for businessmen to make money at the cost of the poor. The case in Andhra Pradesh highlights the selfish nature of microfinance institutions and also stresses on the need to have a proper regulatory authority to regulate these institutions. There is also a need to re-think the working model of microfinance institution. "One of the problems that have surfaced recently is that they (MFIs) have been indulging in multiple lending and large parts of the loans are given for consumption purposes. This is the model that will lend them in troubles. Another major issue that has been plaguing the industry has been the recent debate over commercialization of the microfinance sector Eg: NBFCs encourage villagers to form Joint Liability Groups (JLG) and give loans to the individual members of the JLG. The individual loans are jointly and severally guaranteed by the other members of the Group. Many of the NBFCs operating this model started off as nonprofit entities providing micro-credit and other services to the poor. However, as they found themselves unable to raise adequate resources for a rapid growth of the activity, they converted themselves into for-profit NBFCs.

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This commercialization has led to two things Most of the MFIs getting converted from not-for-profit organizations to for-profit ones. For example, transformation of SHARE from a NGO to NBFC. Entry of commercial players in to MF. For example, commercial banks like ICICI, UTI, and HDFC seeking exposure in rural MF sector. Even though commercialization of MFIs has its own advantages, the financial approach adopted over the poverty lending approach has been a major problem. Financial approach focuses on financial sustainability compared to poverty lending approach which focuses on reaching the poorest of the poor. The Problem with commercialization is there is a possibility of trade-off between profit motive and quality service to the poorest of the poor which is bad for the poor.

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CONCLUSION
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. 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. 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. A vibrant viable microfinance sector is essential in India, where more people live in poverty than in all of Africa. We see four elements as essential to a plan for rebuilding the sector into a force for poverty reduction and financial inclusion, and are working hard to promote these values:

Consumer Protection. Minimum standards for protecting consumers rights need to be set and enforced. This will need to be mandated and orchestrated by the federal government, but the system can be created and run primarily by the private sector. A cornerstone of a consumer-protection strategy would be the establishment of a nationwide credit bureau (as has been done for the microfinance sector in Peru). This would help MFIs ensure that borrowers do not have multiple loans, and are using the loans to fund income-generating business, rather than consumption.

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Improved Transparency and Accountability. Though not all MFIs need to be socially motivated, all should meet standards for ethical behaviour. Some taxation and regulatory benefits might even be available only to those MFIs that meet defined criteria for bringing socio-economic benefits to poor clients. To receive these benefits, socially-motivated MFIs should be required to meet defined standards, which could include using a recognized social-performance monitoring tool (like the PPI) and matching executive compensation (as well as dividends and other payouts to alreadyprosperous investors) to the MFIs overall financial and social performance on a yearto-year basis.

Ensuring Adequate Finance. Regulators over time have closed down a variety of viable financing options for Indian MFIs, forcing them to borrow from Indian banks (which lend to MFIs at interest rates of 10-13%) and private-equity investors from overseas (who are usually eager for profitable exits within 3 to 5 years). MFIs should be able to access financing from a variety of sources, including savings (this is not currently the case in India, as most MFIs cannot offer savings accounts).

Regulatory Reform. While mentioned last, this is by no means the least of the elements. The Indian government should respond to the current crisis in a progressive, forward-looking way that advances financial inclusion and poverty reduction by centralizing and rationalizing the regulation of all types of Indian MFIs. Ideally this should be done at the federal level and by a regulator that does not have obvious conflicts of interest (as many state governments do, because they fund and manage self-help groups that compete with MFIs in giving loans to the poor). Perus approach to regulating microfinance has many positive lessons for India; we have shared the relevant parts with Indian regulators.

India can come up with creative ways of promoting the sustainable growth of pro-poor microfinance while weeding out the bad actors in the sector and recasting an unworkable regulatory patchwork of laws, thereby keeping in essence with microfinance that never strays from its original purpose to enable the poor to lift themselves and their families up out of poverty.

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BIBLOGRAPHY

NEWSPAPER The economic times Business Standard

WEBSITE

www.sksindia.com

WWW.beyondprofit.com

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ANNEXURE
MFIs as engine of inclusive growth
For those of us, who have been in microfinance since its origins about 20 years ago, we remember the days when no one paid much attention to us except other colleagues in the development sector. Much has changed in the past two decades and microfinance has evolved into a thriving sector. Today, microfinance even creates newspaper headlines, sometimes adulatory, and at other times sensational. The truth lies somewhere in between. Microfinance is not a panacea which removes poverty in one go, nor is it a new form of money lending to exploit the poor. Many people in mainstream circles, who have visited field operations of microfinance institutions (MFIs) now, understand how a poor borrower can use a tiny loan to start a sustainable business, generate more income and over a period of time, come out of poverty. They also understand why this kind of painstaking work could not be done by traditional banks, and required a new set of dedicated institutions the MFIs. Unfortunately, recent headlines have focused on some aberrations in microfinance that have then spread misconceptions about the industry as a whole. These misconceptions need to be corrected. For example, parts of southern Karnataka has been in the spotlight because some microfinance customers in districts last year defaulted on loans. While any defaults are troubling, it is important to keep this in perspective. About 25,000 borrowers in southern Karnataka were affected, out of 25 million in the microfinance industry across India about 0.1% of the industry's total portfolio. We are not downplaying the seriousness of what has happened and our industry must strive to curb similar events in the future. But contrary to what a recent spate of articles would have you believe, defaults are not rampant. As a whole, repayment rates across the microfinance industry are 98% and above. In December 2009, a new microfinance industry association called the Microfinance Institutions Network (MFIN) was formed by the top 35 MFIs, which are registered as NBFCs with the RBI. In March 2101, MFIN launched a self-regulatory code of conduct that underscores our commitment to good governance and customer protection. It emphasizes transparent interest rates; limits a borrower's loan through group lending to less than Rs 50,000 total from three microfinance institutions; and includes a whistle-blower policy on code of conduct violations, among other pledges.

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MFIN also has collected Rs 2 crore from its members and has invested this in a RBI-approved credit information bureau. By getting information on the prior borrowings of a customer, MFIs will be able to curb multiple borrowing which can result in over-indebtedness. MFIN's code of conduct also provides that no coercive practices can be used to collect loan repayments. The media have reported some incidences of such practices but specific details are not mentioned. If anybody reports specific incidents of malpractice, MFIN will investigate the incident and if found materially correct, take punitive action against the concerned MFI, as provided in the code of conduct. We want to emphasize that the sector should be judged by its median and best and not by the black sheep that damage our cause and the cause of the people we wish to serve. Every industry has its bad apples and we are committed to expose and expel them.

RBI wary of loans to for-profit MFIs

MUMBAI: The Reserve Bank of India (RBI) has raised questions over bank lending to forprofit microfinance institutions, which then on-lend the money at extremely high rates. The issue was raised by RBI in a recent meeting with bank chairmen, when the central bank also asked lenders to review their microfinance portfolio. This was communicated to lenders in a meeting held by RBI deputy governor Usha Thorat with bank chairmen last week. This was the first meeting undertaken by Ms Thorat after taking over the portfolio of financial inclusion which was hitherto under deputy governor KC Chakrabarty. The central bank's concern stems from the fact that microfinance institutions are lending at rates which the central bank sees as usurious. Central bank officials feel that by lending at around 13%, banks are helping microfinance institutions earn super profits through double digit margins. The meeting took place a few days after market leader SKS Microfinance's `1,654crore IPO was subscribed 13 times. In its offer document, the MFI had said that it had outstanding loans of `2,602 crore from over 40 banks and financial institutions. Banks have been extending loans to MFIs since such lending can be classified as a priority sector loan a part of the direct lending target that each bank has to achieve. The central bank has encouraged banks to lend largely to non-profit institutions and not those that are hoping to generate profits.

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Banks have, however, told RBI that there is merit in lending to for-profit MFIs since it is easier to appraise such borrowers. Also, banks can be sure that such lending is viable. Concerns over the lending rates of MFIs have been raised from other quarters as well. On Friday, C Rangarajan, chairman of the prime minister's Economic Advisory Council warned that high interest rates could hamper the cause of MFIs. He added that it was necessary for the MFIs to separate the pure interest costs from other costs charged to borrowers because of the additional services provided. Ms Thorat also told bank chiefs that credit numbers have not picked up significantly over the previous quarter. She pointed out that while the low base last year was helping them show healthy growth, the year-on-year numbers were hiding the slower sequential growth. The central bank also asked lenders to be prepared for the implementation of advanced version of Basel II norms on capital adequacy. The central bank also invited banks to volunteer to adopt the Basel II norms as a pilot project before they are introduced as a part of regulations. RBI also discussed with banks their preparedness for IFRS, for which a road map was prepared in March this year. As per the road map, all banks will convert their opening balance sheet as at April 1, 2013 in compliance with the IFRS converged Indian Accounting Standards. It was announced in the April credit policy that RBI would undertake a study of the implications of the IFRS' convergence process and issue operational guidelines as appropriate.

MFIs in India are money-spinning machines: Yunus

KOLKATA: Muhammad Yunus , the celebrated pioneer of microfinance, has criticised India's microfinance practitioners for turning the sector into a money spinning opportunity.

The Nobel Peace Prize winner in 2006, jointly with Grameen Bank for creating economic and social development from below in Bangladesh, said microfinance activities in India have taken a wrong turn and referred this as one of the major reasons behind the near-collapse of the sector.

"I feel sorry for the current situation in microfinance sector in India," Yunus said in an interview with ET, even as he is fighting a legal battle against his expulsion from Grameen Bank.

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"One reason for this problem (In India) is some of these microfinance programmes have taken a wrong turn. They see microcredit as a money-making opportunity to make profit for themselves. That has shaken the trust of people who believed in its mission," said the 70-year old Yunus.

"We never saw micro-credit as an opportunity to make money out of the poor," Yunus said. The 38-year-old Grameen Bank today serves 8.3 million poor borrowers. The Nobel laureate has, however, been subjected to bitter smear campaign in Bangladesh since 2007 when he announced to form a political party.

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