A-PROJECT-REPORT-ON-MICROFINANCE-IN-INDIA

1. 201
1
MBA
RESEARCH PROJECT
SABUJ GHOSH
The report is submitted as partial fulfillment of the Requirement
of MBA Program of PTU.
Plot Y8, Block EP, Sector V, Salt Lake, Kolkata
- 700091, India.
|Page 1

2. APPROVED BY JOINT COMMITTEE OF UGC-DEC- AICTE, MINISTRY OF HRD, GOVT: OF INDIA.
RESEARCH PROJECT
STUDENT NAME:
SABUJ GHOSH
MBA Specialization: FINANCE
Registration / Roll No -911170101
Email Id : sabuj1ghosh@gmail.com
MOB- 9433241627.
A PROJECT REPORT ON:-
|Page 2

3. “MICRO-FINANCE MANAGEMENT & CRITICAL ANALYSIS IN INDIA”
With Organization References:-
KDS MFI
FACULTY GUIDE:
NAME: BARNASREE CHANDRA
(FACULTY OF FINANCE)
BRAINWARE BUSINESS SCHOOL
DECLARATION
|Page 3

4. I am Sabuj Ghosh, hereby declare that the Project entitled Micro-finance Critical Analysis & Operation
Management submitted to the Punjab Technical University in partial fulfillment for the award of the
Degree of MASTER IN BUSINESS ADMINISTRATION and that the Project has not previously formed the
basis for the award of any other degree, Diploma, Associate ship, Fellowship or other title.
Place:
Date: Signature of the Candidates.
ACKNOWLEDGEMENT
|Page 4

5. The satisfaction and euphoria that accompanied the successful completion of any task would be
incomplete without the mention of the people who made it possible, whose constant guidance and
encouragement crowned out effort with success. I take this opportunity to express our deep sense of
gratitude and respect to our Supervisor BARNASREE CHANDRA Faculty Member of FINANCE for the
valuable guidance, BRAINWARE BUSINESS SCHOOL (Plot Y 8,Block EP, Sector – V, Salt Lake, Kolkata
-700091) India and Kotalipara Development Society (KDS MFI), Arabida pally, Noapara, Kolkata-124 ,
for providing us with essential facilities for completing and presenting this project. I am greatly
indebted to their help, which has been of immense value and has played a major role in bringing this to
a successful completion. I would like to thank our family and friends for their constant support and
encouragement throughout our project.
-----------
|Page 5

6. ABSTRACT OF THE PROJECT
Learning from the project
* The History of Modern Microfinance. I learnt in detail the process of Micro Finance, from its need
at the grass root level.
*Functioning of various Govt:, Semi Govt: & various other delivery channels.
*Practical learning of how SHGs are formed.
*Practical learning of how the MFIs work.
*Most important learning, how it can change the life of the Economic disadvantaged people.
Learning from the Company
* Microfinance Regulation in India.
*Micro Finance Model.
*Microfinance Management, Critical Analysis.
*Practical learning of Equity, Future & Options market by terminal trading.
*Various strategies of Market.
*Apart from Micro Finance, Nine mine projects, which helped to relate to the
Present Market conditions.
*Business Model.
|Page 6

7. TABLE OF CONTENTS
PAGE
*DECLARATION 4
*ACKNOWLEDGEMENT 5
*ABSTRACT OF THE PROJECT 6
Chapter 1- Introduction
8 2- The History of Modern Microfinance
8
3- Overview Chapter 9
4- Government’s role supporting microfinance 12
5- Microfinance Social Aspects 13
6- The Need in India 14
7- Micro-Financing Regulation in India 14
8- Micro Finance Models 16
9- Coordinating Microfinance Efforts in India 18
10- Microfinance Strategic 19
11- Microfinance Management 22
12- Critical Analysis 27
13- Micro-Finance Accounting and Management Information Systems 34
14- Capital Requirements 41
15- Development Fund 43
16- NABARD's Support to microfinance Institutions (MFIs) 45
17- Business Model of KDS MFI 46
19- Success Factors of Micro-Finance in India 56
20- Future of Micro Finance 57
21- Top 50 Microfinance Institutions in India 59
22- Microfinance India Summit 2010 61
• Recommendations and suggestions 62
• ACRONOMY 62
• Conclusion 63
• References 64
|Page 7

8. 1. Introduction
A. About Microfinance: Microfinance is a general term to describe financial services to low-income
individuals or to those who do not have access to typical banking services.
Microfinance is also the idea that low-income individuals are capable of lifting themselves out of poverty if
given access to financial services. While some studies indicate that microfinance can play a role in the battle
against poverty, it is also recognized that is not always the appropriate method, and that it should never be
seen as the only tool for ending poverty.
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 endeavored 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.
‘Microfinance refers to small scale financial services for both credits and deposits- that are provided to people
who farm or fish or herd; operate small or micro enterprise where goods are produced, recycled, repaired, or
traded; provide services; work for wages or commissions; gain income from renting out small amounts of land,
vehicles, draft animals, or machinery and tools; and to other individuals and local groups in developing
countries in both rural and urban areas’.
Marguerite S. Robinson.
2. The History of Modern Microfinance
A. ABSTRACT:
In the late 1970s the concept of microfinance had evolved. Although, microfinance have a long
history from the beginning of the 20th century we will concentrate mainly on the period after
1960.
Many credit groups have been operating in many countries for several years, for example, the
"chit funds" (India), tontines" (West Africa), "susus" (Ghana), "pasanaku" (Bolivia) etc. Besides,
many formal saving and credit institutions have been working for a long time throughout the
world.
During the early and mid 1990s various credit institutions had been formed in Europe by some
organized poor people from both the rural and urban areas. These institutions were named
Credit Unions, People's Bank etc. The main aim of these institutions was to provide easy
access to credit to the poor people who were neglected by the big financial institutions and
banks.
|Page 8

9. In the early 1970s, few experimental programs had started in Bangladesh, Brazil and some other
countries. The poor people had been given some small loans to invest in micro-business. This kind of
micro credit was given on the basis of solidarity group lending, that is, each and every member of that
group guaranteed the repayment of the loan of all the members.
Many banks and financial institutions have been pioneering the microfinance program after 1970.
These are listed below.
B. ACCION International:
This institution had been established by a law student of Latin America to help the poor people
residing in the rural and urban areas of the Latin American countries. Today, in 2008, it is one of the
most important microfinance institutions of the world. Its network of lending partner comprises not only
Latin America but also US and Africa.
C. SEWA Bank:
In 1973, the Self Employed Women's Association (SEWA) of Gujarat (in India) formed a bank,
named as Mahila SEWA Cooperative Bank, to access certain financial services easily. Almost 4
thousand women contributed their share capital to form the bank. Today the number of the SEWA
Bank's active client is more than 30,000.
D. GRAMEEN Bank:
Credit unions and lending cooperatives have been around hundreds of years. However, the
pioneering of modern microfinance is often credited to Dr. Mohammad Yunus, who began
experimenting with lending to poor women in the village of Jobra, Bangladesh during his tenure as a
professor of economics at Chittagong University in the 1970s. He would go on to found Grameen
Bank in 1983 and win the Nobel Peace Price in 2006.
Since then, innovation in microfinance has continued and providers of financial services to the poor
continue to evolve. Today, the World Bank estimates that about 160 million people in developing
countries are served by microfinance. Grameen Bank (Bangladesh) was formed by the Nobel Peace
Prize (2006) winner Dr Muhammad Younus in 1983. This bank is now serving almost 400, 0000 poor
people of Bangladesh. Not only that, but also the success of Grameen Bank has stimulated the
formation of other several microfinance institutions like, ASA, BRAC and PROSHIKA .
3. Overview
A. Microfinance Definition:
According to International Labor 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.
"Microfinance is the supply of loans, savings, and other basic financial services to the poor."
|Page 9

10. As these financial services usually involve small amounts of money - small loans, small savings, etc. - the term
"microfinance" helps to differentiate these services from those which formal banks provide
It's easy to imagine poor people don't need financial services, but when you think about it they are using these
services already, although they might look a little different.
"Poor people save all the time, although mostly in informal ways. They invest in assets such as gold, jewelry,
domestic animals, building materials, and things that can be easily exchanged for cash. They may set aside
corn from their harvest to sell at a later date. They bury cash in the garden or stash it under the mattress. They
participate in informal savings groups where everyone contributes a small amount of cash each day, week, or
month, and is successively awarded the pot on a rotating basis. Some of these groups allow members to
borrow from the pot as well. The poor also give their money to neighbors to hold or pay local cash collectors to
keep it safe.
"However widely used, informal savings mechanisms have serious limitations. It is not possible, for example, to
cut a leg off a goat when the family suddenly needs a small amount of cash. In-kind savings are subject to
fluctuations in commodity prices, destruction by insects, fire, thieves, or illness (in the case of livestock).
Informal rotating savings groups tend to be small and rotate limited amounts of money. Moreover, these groups
often require rigid amounts of money at set intervals and do not react to changes in their members' ability to
save. Perhaps most importantly, the poor are more likely to lose their money through fraud or mismanagement
in informal savings arrangements than are depositors in formal financial institutions.
“Poor rarely access services through the formal financial sector. They address their need for financial services
through a variety of financial relationships, mostly informal."
B. Role of Microfinance:
The micro credit of microfinance prename 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
1. Microfinance helps poor households meet basic needs and protects them against risks.
2. The use of financial services by low-income households leads to improvements in household economic
welfare and enterprise stability and growth.
3. By supporting women’s economic participation, microfinance empowers women, thereby promoting gender-
equity and improving household well being.
4. The level of impact relates to the length of time clients have had access to financial services.
C. Difference between micro credit and microfinance:
Micro credit refers to very small loans for unsalaried borrowers with little or no collateral, provided by legally
registered institutions. Currently, consumer credit provided to salaried workers based on automated credit
scoring is usually not included in the definition of micro credit, although this may change.
Microfinance typically refers to micro credit, savings, insurance, money transfers, and other financial products
targeted at poor and low-income people.
D. Borrowers:
|Page 10

11. Most micro credit borrowers have micro enterprises—unsalaried, informal income-generating activities.
However, micro loans may not predominantly be used to start or finance micro enterprises. Scattered research
suggests that only half or less of loan proceeds are used for business purposes. The remainder supports a
wide range of household cash management needs, including stabilizing consumption and spreading out large,
lumpy cash needs like education fees, medical expenses, or lifecycle events such as weddings and funerals.
Some MFIs provide non-financial products, such as business development or health services. Commercial and
government-owned banks that offer microfinance services are frequently referred to as MFIs, even though only
a portion of their assets may be committed to financial services to the poor.
E. Activities in Microfinance:
Micro credit: It is a small amount of money loaned to a client by a bank or other institution. Micro credit 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.
Product Design: The starting point is: how do MFIs decide what product s to offer? The actual loan products
need to be designed according to the demand of the target market. Besides the important question of what
risks to cover, organizations also have to decide whether they want to bundle many different benefits into one
basket policy, or whether it is more appropriate to keep the product simple. For marketing purposes, MFI‘s
sometimes prefer the basket cover, since it can make the policies sound comprehensive, but is that the right
approach for the low-income market? After picking products, one must also understand how they are priced.
What assumptions do the organizations make with regard to operating costs, risk premiums, and reinsurance,
and how did they come to those conclusions? Would their clients be willing to pay more for greater benefits?
From price, the logical next set of questions involves efficiency. Indeed, given the relative high costs of
delivering large volumes of small policies, maximizing efficiency is a critical strategy to ensuring that the
products are affordable to the low-income market. One way is to make the products mandatory, which
increases volumes, reduces transaction costs and minimizes adverse selection. What does an organization
lose by offering mandatory insurance, and how does it overcome the disadvantages? MFI‘s can combine a
mandatory product with some voluntary features to make the service more us to mar-oriented while.
Techniques of Product Design: To design a loan product to meet borrower needs it is important to
understand the cash pattern of the borrowers. Cash pattern is important so far as they affect the debt capacity
of the borrowers. Lenders must ensure that borrowers have sufficient cash inflow to cover loan payments when
they are due efficiency depends less on the delivery model than on the simplicity of the product or product
menu. Simple products work best because they are easier to administer and easier for clients to understand.
Another efficiency strategy is to use technology to reduce paperwork, manual processing and errors.
MFIs need to conduct a costing analysis to determine how much they need to earn in commission to cover
their administrative expenses.
F. MFI’s Products and its Management:
|Page 11

12. Product & services of Microfinance
Financial Services Other Financial Services Non Financial Services
1. Credit Services-i Small Credit, Micro-insurance, Life Insurance , Family Health and Sanitation
Small Business Credit. Health Insurance , Loan for Education, Financial Education,
Housing, Education, Health. Micro-entrepreneur Training.
2. Deposit Services - Voluntari
Savings Services, Manda tory
Savings.
G. The micro-credits model:
*The model is fairly straightforward and simple.
*Focus on jump-starting self-employment, providing the capital for poor women to use their innate "survival
skills" to pull themselves out of poverty.
*Lend to women in small groups (credit circles), say of five or seven.
* Make loans of small amounts to two out of five.
* The three who have not received loans will be eligible only when this first round of loans has been repaid.
* Draw up a weekly or bi-weekly repayment schedule.
* In case any member defaults the entire circle is denied access to credit.
* Banks have been given freedom to formulate their own lending norms keeping in view ground realities. They
have been asked to devise appropriate loan and savings products and the related terms and conditions
including size of the loan, unit cost, unit size, maturity period, grace period, margins, etc.
4. Government’s role supporting microfinance
Government’s most important role is not provision of retail credit services, for reasons mentioned in
Government can contribute most effectively by:
*Setting sound macroeconomic policy that provides stability and low inflation.
*Avoiding interest rate ceilings - when governments set interest rate limits, political factors usually result in
limits that are too low to permit sustainable delivery of credit that involves high administrative costs—such as
tiny loans for poor people. Such ceilings often have the announced intention of protecting the poor, but are
more likely to choke off the supply of credit.
*Adjusting bank regulation to facilitate deposit taking by solid MFIs, once the country has experience with
sustainable microfinance delivery.
*Creating government wholesale funds to support retail MFIs if funds can be insulated from politics, and they
can hire and protect strong technical management and avoid disbursement pressure that force fund to support
unpromising MFIs.
*Promote microfinance as a key vehicle in tackling poverty, and as vital part of the financial system.
*Create policies, regulations and legal structures that *encourage responsive, sustainable microfinance.
*Encourage a range of regulated and unregulated institutions that meet performance standards.
|Page 12

13. *Encourage competition, capacity building and innovation to lower costs and interest rates in microfinance.
*Support autonomous, wholesale structures.
RBI data shows that informal sources provide a significant part of the total credit needs of the rural population.
The magnitude of the dependence of the rural poor on informal sources of credit can be observed from the
findings of the All India Debt and Investment Survey, 1992, which shows that the share of the Non-institutional
agencies (informal sector) in the outstanding cash dues of the rural households were 36 percent. However, the
dependence of rural households on such informal sources had reduced of their total outstanding dues steadily
from 83.7 percent in 1961 to 36 percent in 1991.
5. Microfinance Social Aspects
Micro financing institutions significantly contributed to gender equality and women’s empowerment as well as
poor development and civil society strengthening. Contribution to women’s 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 women’s 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.
Savings services help poor people: Savings has been called the “forgotten half of microfinance.” Most poor
people now use informal mechanisms to save because they lack access to good formal deposit services,. They
may tuck cash under the mattress; buy animals or jewelry that can be sold off later, or stockpile inventory or
building materials.
These savings methods tend to be risky—cash can be stolen, animals can get sick, and neighbors can run off.
Often they are illiquid as well – one cannot sell just the cow’s leg when one needs a small amount of cash.
Poor people want secure, convenient deposit services that allow for small balances and easy access to funds.
MFIs that offer good savings services usually attract far more savers than borrowers.
Women’s indicators of empowerment through microfinance:
*Ability to save and access loans
*Opportunity to undertake an economic activity
*Mobility-Opportunity to visit nearby towns
*Awareness- local issues, MFI procedures, banking transactions
*Skills for income generation
|Page 13

14. *Decision making within the household
* Group mobilization in support of individual clients- action on.
6. The Need in India
India is said to be the home of one third of the world’s 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 micro credit 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 world’s poverty by 2015.
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.
While India is one of the fastest growing economies in the world, poverty runs deep throughout country.
About two thirds of India’s more than 1billion people live in rural areas and almost 170 million of them
are poor.
For more than 21 percent of them, poverty is a chronic condition. Three out of four of India’s poor live in
rural areas of the country. Poverty is deepest among scheduled castes and tribes in the country’s rural
areas.
The micro-finance scene in India is dominated by Self Help Groups (SHGs) - Banks linkage program for
over a decade now. As the formal banking system already has a vast branch network in rural areas, it
was perhaps wise to find ways and means to improve the access of rural poor to the existing banking
network. This was tried by routing financial.
Indian microfinance is poised for continued growth and high valuation but faces pressing challenges and
opportunities that—left unaddressed—could negatively impact the long-term future of the industry.
The industry needs to move past a single-minded focus on scale, expand the depth and breadth of products
and services offered, and focus on the double bottom line and over indebtedness to effectively address the
risks facing the industry.
7. Micro-Financing Regulation in India
Advantage of Regulation:
Following are the advantages and benefits of regulation and supervision of /MFIs:
i. Protects the interest of the depositors;
ii. Put in place prudential norms, standards and practices;
iii. Provides sufficient information about the true risks faced by the banks/MFIs;
iv. Promoters systemic stability and thereby sustains public confidence in the banks/MFIs;
v. Prevents a bank’s/MFI’s failure/potential dangers through timely interventions;
vi. Penalizes the violations, misconducts, non-compliance to the norms of behavior;
vii. Provides invaluable advisory inputs for problem-solving and overall improvement of the banks/MFIs;
viii. Promoters safe, strong and sound banking/MF system and effective banking/MF policy and
|Page 14

15. ix. Promotes and enhances orderly economic growth and development.
A. Unified Regulation System: 8.18 at present, all the regulatory aspects of microfinance are
not centralized. For example, while the Rural Planning and Credit Department (RPCD) in RBI looks
after Rural lending, MF-NBFCs are under the control of the Department of Non-Banking Supervision
(DNBS) and External Commercial Borrowings are looked after by the Foreign Exchange Department.
The Committee feels that RBI may consider bringing all regulatory aspects of microfinance under a
single, mechanism. Further, supervision Of MF-NBFCs could be delegated to NABARD by RBI.
B. Legal forms of MFIs in India:
MFIs and Legal Forms: With the current phase of expansion of the SHG – Bank linkage programmed and
other MF initiatives in the country, the informal micro finance sector in India is now beginning to evolve. The
MFIs in India can be broadly sub-divided into three categories of organizational forms as given in Table 1.
While there is no published data on private MFIs operating in the country, the number of MFIs is estimated to
be around 800. However, not more than 10 MFIs are reported to have an outreach of 100,000 micro finance
clients. An overwhelming majority of MFIs are operating on a smaller scale with clients ranging Between 500 to
1500 per MFI. The geographical distribution of MFIs is very much lopsided with concentration in the southern
India where the rural branch network of formal banks is excellent. It is estimated that the share of MFIs in the
total micro credit portfolio of formal & informal institutions is about 8 per cent.
*Not for profit MFIs governed by societies registration act, 1860 or Indian trusts act 1882
*Non profit companies governed by section 25 of the companies act, 1956
*For profit MFIs regulated by Indian companies act, 1956
*NBFC governed by RBI act, 1934.
*Cooperative societies by cooperative societies act enacted by state government.
Legal Forms of MFIs in India:
Types of MFIs Estimated Legal Acts under which Registered
Number*
1. Not for Profit MFIs 400 to 500 Societies Registration Act, 1860 or similar
Provincial Acts
a.) NGO - MFIs Indian Trust Act, 1882
b.) Non-profit Companies 10 Section 25 of the Companies Act, 1956
2. Mutual Benefit MFIs 200 to 250 Mutually Aided Cooperative Societies Act
a.) Mutually Aided Cooperative enacted by State Government
Societies (MACS) and similarly set
up institutions
3. For Profit MFIs 6 Indian Companies Act, 1956
a.) Non-Banking Financial Reserve Bank of India Act, 1934
Companies (NBFCs)
Total 700 - 800
* The estimated number includes only those MFIs, which are actually undertaking lending activity.
C. Recommendation by RBI Micro Credit Institutions:
• Company Law Board to allow SHGs to be members of Section 25 of the companies act.
|Page 15

16. • There will be no ceiling in respect of loan amount extended by Section 25 companies to SHGs;
however SHGs, to provide credit not exceeding Rs. 50000/- per member of the SHG. RBI may
consider issuing revised instructions.
• As regards capital, to encourage more flow of donations/ contributions, donors to be exempted from
income tax under Section 11C of the IT Act.
• As regards capital adequacy, since there is no mandatory capital requirement, minimum standards
need not be considered.
• Savings of SHGs promoted by Section 25 companies be maintained with permitted organizations.
• Complete income tax exemption for Section 25 companies purveying micro credit (to the donor and to
the receiver).
Government to consider complete exemption from IT for income earned, as the main purpose of the
organization is to empower the poor.
Indian microfinance is poised for continued growth and high valuation but faces pressing challenges and
opportunities that—left unaddressed—could negatively impact the long-term future of the industry.
The industry needs to move past a single-minded focus on scale, expand the depth and breadth of products
and services offered, and focus on the double bottom line and over indebtedness to effectively address the
risks facing the industry.
8. Micro Finance Models
A. Microfinance Providers:
a. Microfinance Institutions: A microfinance institution (MFI) is an organization that
provides microfinance services.
MFIs range from small non-profit organizations to large commercial banks. Most MFIs started as not-
for-profit organizations like NGOs (non-governmental organizations), credit unions and other financial
cooperatives, and state-owned development and postal savings banks. An increasing number of MFIs
are now organized as for-profit entities, often because it is a requirement to obtaining a license from
banking authorities to offer savings services. For-profit MFIs may be organized as Non-Banking
Financial Companies (NBFCs), commercial banks that specialize in microfinance, or microfinance
departments of full-service banks.
The micro finance service providers include apex institutions like National Bank for Agriculture and Rural
Development (NABARD), Small Industries Development Bank of India (SIDBI), and, Rashtriya Mahila Kosh
(RMK). At the retail level, Commercial Banks, Regional Rural Banks, and, Cooperative banks provide micro
finance services. Today, there are about 60,000 retail credit outlets of the formal banking sector in the rural
areas comprising 12,000 branches of district level cooperative banks, over 14,000 branches of the Regional
Rural Banks (RRBs) and over 30,000 rural and semi-urban branches of commercial banks besides almost
90,000 cooperatives credit societies at the village level. On an average, there is at least one retail credit outlet
for about 5,000 rural people. This physical reaching out to the far-flung areas of the country to provide savings,
credit and other banking services to the rural society is an unparalleled achievement of the Indian banking
system. In the this paper an attempt is made to deal with various aspects relating to emergence of private
micro finance industry in the context of prevailing legal and regulatory environment for private sector rural and
micro finance operators.
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.
|Page 16

17. 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” 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.
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” 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.
b. For NGOs:1. The field of development itself expands and shifts emphasis with the pull of ideas, and
NGOs perhaps more readily adopt new ideas, especially if the resources required are small, entry and exit are
easy, tasks are (perceived to be) simple and people’s acceptance is high – all characteristics (real or
presumed) of microfinance.
2. Canvassing by various actors, including the National Bank for Agriculture and Rural Development
(NABARD), Small Industries Development Bank of India (SIDBI), Friends of Women’s World Banking (FWWB),
Rashtriya Mahila Kosh (RMK), Council for Advancement of People’s Action and Rural Technologies
(CAPART), Rashtriya Gramin Vikas Nidhi (RGVN), various donor funded programmes especially by the
International Fund for Agricultural Development (IFAD), United Nations Development Programme (UNDP),
World Bank and Department for International Development, UK (DFID)], and lately commercial banks, has
greatly added to the idea pull. Induced by the worldwide focus on microfinance, donor NGOs too have been
funding microfinance projects. One might call it the supply push.
3. All kinds of things from khadi spinning to Nadep compost to balwadis do not produce such concrete results
and sustained interest among beneficiaries as microfinance. Most NGO-led microfinance is with poor women,
for whom access to small loans to meet dire emergencies is a valued outcome. Thus, quick and high ‘customer
satisfaction’ is the USP that has attracted NGOs to this trade.
4. The idea appears simple to implement. The most common route followed by NGOs is promotion of SHGs. It
is implicitly assumed that no ‘technical skill’ is involved. Besides, external resources are not needed as SHGs
begin with their own savings. Those NGOs that have access to revolving funds from donors do not have to
worry about financial performance any way. The chickens will eventually come home to roost but in the first
flush, it seems all so easy.
5. For many NGOs the idea of ‘organizing’ – forming a samuha – has inherent appeal. Groups connote
empowerment and organizing women is a double bonus.
6. Finally, to many NGOs, microfinance is a way to financial sustainability. Especially for the medium-to-large
NGOs that are able to access bulk funds for on-lending, for example from SIDBI, the interest rate spread could
be an attractive source of revenue than an uncertain, highly competitive and increasingly difficult-to-raise donor
funding.
C. Service Company Model: In this context, the Service Company Model developed by ACCION and
used in some of the Latin American Countries is interesting. The model may hold significant interest for state
owned banks and private banks with large branch networks. Under this model, the bank forms its own MFI,
|Page 17

18. 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.
9. Coordinating Microfinance Efforts in India
NABARD coordinates the microfinance activities in India at international/ national/ state / district levels. These
include organizing international/national Workshops, Seminars, etc for experience sharing, Organizing National
and State level Meets of Bankers and NGOs etc .Dissemination of best practices in SHG / microfinance.
A. Other Initiatives: Micro enterprise Development Programmer (MEDP) for Matured SHGs
The progression of SHG members to take up micro enterprise involves intensive training and hand holding on
various aspects including understanding market, potential mapping and ultimately fine tuning skills and
entrepreneurship to manage the enterprise. Hence, a separate, specific and focused skill-building programme
‘Micro Enterprise Development Programmed (MEDP)’ has been formulated.
This involves organizing short duration, location specific programmers on skill up gradation / development for
setting up sustainable micro-enterprises by matured SHG members. The duration of training programme can
vary between 3 to 13 days, depending upon the objective and nature of training. The training may be
conducted by agencies that have background and professional competency in the field of micro enterprise
Development with an expertise in skill development.
B. Scheme for Capital/ Equity Support to Micro-Finance Institutions (MFIs) from MFDEF: The
scheme attempts to provide capital/equity support to Micro Finance Institutions (MFIs) so as to enable
them to leverage capital/equity for accessing commercial and other funds from banks, for providing
financial services at an affordable cost to the poor, and to enable MFIs to achieve sustainability in their
credit operations over a period of 3-5 years.
C. Scheme for financial assistance to banks/ MFIs for rating of Micro Finance Institutions (MFIs): In
order to identify MFIs, classify and rate such institutions and empower them to intermediate
between the lending banks and the clients, NABARD has decided to extend financial
assistance to Commercial Banks and Regional Rural Banks by way of grant. The banks can
avail the services of credit rating agencies, M-CRIL, ICRA, CARE and Planet Finance in
addition to CRISIL for rating of MFIs. The financial assistance by way of grant for meeting the
cost of rating of MFIs would be met by NABARD to the extent of 100% of the total professional
fees subject to a maximum of Rs.3,00,000/-/-. The remaining cost would be borne by the
concerned MFI.
The cost of local hospitality (including boarding and lodging) towards field visit of the team from the
credit rating Agency, as a part of the rating exercise, would also be borne by the MFI. Those MFIs
which have a minimum loan outstanding of more than Rs. 50.00 lakh (Rupees fifty lakh only) and
maximum of Rs 10 crore (Rupees Ten crore only) would be considered for rating and support under
the scheme. Financial assistance by way of grant would be available only for the first rating of the
MFI.
MFIs availing Capital Support and/or Revolving Fund Assistance from NABARD are also eligible for re-
imbursement of 50% of the cost of professional fee charged by Credit Rating Agency for second rating subject
to a maximum of Rs.1.50 lakh (i.e 50% of Rs.3 lakh). This will be in addition to the re-imbursement of
professional fee for first rating of the MFI.
D. Refinance support to banks for financing MFIs: The scheme is to provide 100% refinance to banks
for financing MFIs. Interest rate on refinance to Commercial Banks and Regional Rural Banks on their
|Page 18

19. loans to MFIs for on lending to clients will be at 3% less than that charged by banks subject to minimum
interest rate of 7.5% for all regions and all eligible purposes. The revised rate of interest is applicable to
refinance disbursed on or after 01 March 2010.
Source: NABARD website
10. Microfinance Strategic
Strategic Management: Strategic management is a field that deals with the major intended and emergent
initiatives taken by general manager on behalf of owners, involving utilization of resources, to enhance the
performance of rams in their external environments. It entails.
Understanding microfinance strategies: This report explores strategic issues shaping the future of the MFI
sector in India.
The study approached CEOs of select MFIs with a set of issues ranging from concerns to competition and
sought their opinions about future strategies. The report draws from their responses, and states that:
• Future strategy is about being strong on processes and being overtly client-centric;
• Success is a prudential combination of three factors, namely, culture, beliefs and aspirations;
• Culture is about the degree of trust rather than the rate of interest;
• Risk management systems of economically weaker families are built on their beliefs about
dependability and access;
• Micro credit stories have revealed ingenious ways that clients have used their loans for purposes that
satisfied their aspirations.
Finally, the sector, at about Rs. 14,000 crore (approximately US$3 bn) looks large, but is small by any business
scale. Competition and unhealthy practices are overshadowing the good work and reputation earned over
many years. MFIs in India need to overcome these challenges in the future.
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.
A. Product-market matrix:
A market penetration strategy is a business-as-usual strategy, where the MFI focuses on achieving growth by
selling existing products in existing markets. This can be done through more competitive pricing strategies,
increased promotional activities, and more liberal terms and conditions.
For example, the MFI may develop strategic alliances to begin
|Page 19

20. *Adapted from Ansoff 1957.
B. The BCG Growth-Share Matrix:
The BCG Growth-Share Matrix is a portfolio planning model developed by Bruce Henderson of the Boston
Consulting Group in the early 1970's. It is based on the observation that a company's business units can
be classified into four categories based on combinations of market growth and market share relative to
the largest competitor, hence the name "growth-share". Market growth serves as a proxy for industry
attractiveness, and relative market share serves as a proxy for competitive advantage. The growth-share
matrix thus maps the business unit positions within these two important determinants of profitability.
BCG Growth-Share Matrix
This framework assumes that an increase in relative market share will result in an increase in the
generation of cash. This assumption often is true because of the experience curve; increased relative
market share implies that the firm is moving forward on the experience curve relative to its competitors,
thus developing a cost advantage. A second assumption is that a growing market requires investment in
assets to increase capacity and therefore results in the consumption of cash. Thus the position of a
business on the growth-share matrix provides an indication of its cash generation and its cash
consumption.
Henderson reasoned that the cash required by rapidly growing business units could be obtained from the
firm's other business units that were at a more mature stage and generating significant cash. By investing
to become the market share leader in a rapidly growing market, the business unit could move along the
experience curve and develop a cost advantage.
From this reasoning, the BCG Growth-Share Matrix was born.
The four categories are:
|Page 20

21. Dogs - Dogs have low market share and a low growth rate and thus neither generate nor consume a
large amount of cash. However, dogs are cash traps because of the money tied up in a business that has
little potential. Such businesses are candidates for divestiture.
Question marks - Question marks are growing rapidly and thus consume large amounts of cash, but
because they have low market shares they do not generate much cash. The result is large net cash
consumption. A question mark (also known as a "problem child") has the potential to gain market share
and become a star, and eventually a cash cow when the market growth slows. If the question mark does
not succeed in becoming the market leader, then after perhaps years of cash consumption it will
degenerate into a dog when the market growth declines. Question marks must be analyzed carefully in
order to determine whether they are worth the investment required to grow market share.
Stars - Stars generate large amounts of cash because of their strong relative market share, but also
consume large amounts of cash because of their high growth rate; therefore the cash in each direction
approximately nets out.
If a star can maintain its large market share, it will become a cash cow when the market growth rate
declines. The portfolio of a diversified company always should have stars that will become the next cash
cows and ensure future cash generation.
Cash cows - As leaders in a mature market, cash cows exhibit a return on assets that is greater than the
market growth rate, and thus generate more cash than they consume. Such business units should be
"milked", extracting the profits and investing as little cash as possible. Cash cows provide the cash
required to turn question marks into market leaders, to cover the administrative costs of the company, to
fund research and development, to service the corporate debt, and to pay dividends to shareholders.
Because the cash cow generates a relatively stable cash flow, its value can be determined with
reasonable accuracy by calculating the present value of its cash stream using a discounted cash flow
analysis.
Under the growth-share matrix model, as an industry matures and its growth rate declines, a business
unit will become either a cash cow or a dog, determined solely by whether it had become the market
leader during the period of high growth.
While originally developed as a model for resource allocation among the microfinance business units in a
corporation, the growth-share matrix also can be used for resource allocation among products within a
single business unit. Its simplicity is its strength - the relative positions of the firm's entire business
portfolio can be displayed in a single diagram.
Limitations
The growth-share matrix once was used widely, but has since faded from popularity as more
comprehensive models have been developed. Some of its weaknesses are:
Market growth rate is only one factor in industry attractiveness, and relative market share is only one
factor in competitive advantage. The growth-share matrix overlooks many other factors in these two
important determinants of profitability. The framework assumes that each business unit is independent of
the others. In some cases, Microfinance business unit that is a "dog" may be helping other business units
gain a competitive advantage.
The matrix depends heavily upon the breadth of the definition of the market. A business unit may
dominate its small niche, but have very low market share in the overall industry. In such a case, the
definition of the market can make the difference between a dog and a cash cow.
While its importance has diminished, the BCG matrix still can serve as a simple tool or viewing a
corporation's business portfolio at a glance, and may serve as a starting point for discussing resource
allocation among strategic business units.
C. Overall Strategy:
|Page 21

22. *Forming and nurturing small, homogeneous and participatory self-help groups (SHGs) of the poor has today
emerged as a potent tool for human development.
This process enables the poor, especially the women from the poor households, to collectively identify and
analyses the problems they face in the perspective of their social and economic environment. It helps them to
pool their meager resources, human and financial, and priorities their use for solving their own problems.
*The emphasis on regular thrift collection and its use to solve immediate problems of consumption and
production not only helps to meet their most urgent needs, but also trains them to handle larger financial
resources more skillfully, prudently and with a more lasting impact.
*Encourage SHGs to become a forum for many social sector interventions.
D. SHG-Bank Linkage Programmer:
A Facilitating SHGs to access credit from formal banking channels. SHG-Bank Linkage Programmer has
proved to be the major supplementary credit delivery system with wide acceptance by banks, NGOs and
various government departments.
E. Capacity Building:
Capacity building must be tailored to meet the differing needs of the nascent/emerging MFIs and of
the expanding/mature MFIs. There is a pressing need to develop comprehensive, relevant and
integrated training modules on a wide range of topics to professionalize Indian microfinance – thus
building the much sought-after second tier management in MFIs. The industry continues to grow, and
so does the demand for competent middle management. Currently, these are typically sourced by
MFIs from the rural institutes of management. But these rural institutes are using curricula largely
based on the one developed by SIDBI nearly a decade ago – and it is high time to revisit this
curriculum, to update it both in terms of content (to reflect the new realities in India microfinance) and
in terms of its delivery (to use multi-media/practical examples, and thus bring the courses to life with
video clips, case studies and field-based exercises that take the students out into the field).
11.Microfinance Management:
A. Objectives: The programmer aims at enabling the participants to gain a clear understanding of various
policies, conceptual, and operational issues involved in developing effective and successful
microfinance interventions.
B. Innovative Methodologies: Tiny amount of loan to large number of borrowers at their doorstep is a
costly operation compared to revenue income. Cost reduction is also an essential element in
microfinance operation. Reducing cost can be possible either offering larger loan size or by innovating
no conventional Management which is less costly.
The essences of innovative management are as follows:
1. Specialized operation.
2. Documentation of essential information only.
3. Simple product, simple loan application and verification process.
4. Absence of grant guarantee.
|Page 22

23. 5. Staff recruitment in no conventional manner.
6. On the job training (each one teaches one).
7. Simple standard loan register along with ledger and cash book abandoning the bookkeeper/cashier.
8. Standard furniture, fixture and collective use of facilities in the office.
9. Decentralized branch structure.
10. Branch level financial planning.
11. Strong monitoring from mid and head office.
12. Written Manual.
C. Microfinance Working Environment: How can microfinance institutions (MFIs) help improve working
conditions? How can they contribute to job creation? And how can MFIs help reduce child labor? Should MFIs
have an interest in addressing these and other decent work issues? These are some of the questions that the
ILO intends to address through an experimental global action research programmer (2008-2011) in partnership
with microfinance Institutions interested in promoting decent work. Access to micro credit or other financial
services can help improve the decent work status. Conditional loans, credit with education, incentives like
interest rate rebates, linkages with social partners and NGOs as well as the provision of micro insurance,
conditional cash transfers or health care can be effective ways to reduce child labor, decrease vulnerabilities,
raise awareness and create incentives to improve working conditions.
Enabling Environment:
Favorable environment for microfinance in different manners are prevailing in most developing countries.
Favorable environment is not only among Government but also among general public, civil society, media and
various institutions within the country needed for favorable growth of microfinance for poverty reduction.
Though Government is favorable in general to microfinance in many countries but specific modalities of NGOs/
MFIs determine the nature of favorable.
D. Current Challenging Issues:
1. Capacity Building: The long-term future of the micro-finance sector depends on MFIs being able to achieve
operational, financial and institutional sustainability.
2. Innovation: Tiny amount of loan to large number of borrowers at their doorstep is a costly operation
compared to revenue income. Cost reduction is also an essential element in microfinance operation.
Reducing cost can be possible either offering larger loan size or by innovating no conventional Management
which is less costly.
3. Funding: A substantial outreach is a guarantee of efficiency that can play a large part in leveraging funds.
4. Outreach: A substantial outreach is a guarantee of efficiency that can play a large part in leveraging funds.
E. HR Issues: Recruitment and retention is the major challenge faced by MFIs as they strive to reach more
clients and expand their geographical scope. Attracting the right talent proves difficult because candidates
must have, as a prerequisite, a mindset that fits with the organization’s mission.
|Page 23

24. Many mainstream commercial banks are now entering microfinance, who are poaching staff from MFIs and
MFIs are unable to retain them for other job opportunities. 85% of the poorest clients served by microfinance
are women. However, women make up less than half of all microfinance staff members, and fill even fewer of
the senior management roles. The challenge in most countries stems from cultural notions of women’s roles,
for example, while women are single there might be a greater willingness on the part of women’s families to let
them work as front line staff, but as soon as they marry and certainly once they start having children, it
becomes unacceptable. Long distances and long hours away from the family are difficult for women to
accommodate and for their families to understand.
F. Microfinance Training & Capacity Building Methods:
1. Microfinance Training Methodology and How to Build Efficient Workforce?
2. Staff Motivation & Built in Cost effective Training Component.
3. Human Resource Planning and Development.
4. Good Governance.
G. SWOT MATRIX for Microfinance Management:
STRENGTHS
1. Experienced senior management Team.
2. Robust IT system.
3. Clear and well defined HR policy.
4. Infusion of own equity - commitment from promoters.
5. Process innovation.
6. Clarity and good understanding of vision.
7. Transparency at all levels.
8. Plans for value added and livelihood support services (LDS).
9. Shared ownership.
WEAKNESSES
1. Limited resources.
2. Micro managing.
3. Start up organisation; therefore, yet to institutionalise the standard processes.
4. Attracting/Holding on to the staff till the time we become established players.
5. Refine the processes for growth.
OPPORTUNITIES
1. Huge Potential Market.
2. Scope of introducing livelihood related services.
3. Financial crunch is helping organisation to be cost conscious and effective.
4. IT systems.
THREATS
1. Financial crisis.
2. Increasing competition.
3. Increasing competition.
|Page 24

25. 4. Poor banking infrastructure.
5. Political instability.
H. Microfinance Operation management:
1. Capacity Building: The long-term future of the micro-finance sector depends on MFIs being able to
achieve operational, financial and institutional sustainability. The constraints and challenges vary with the
different types and development stage of MFIs. Most MFIs are currently operating below operational viability
and use grant funds from donors for financing up-front costs of establishing new groups and covering initial
losses incurred until the lending volume builds up to a break-even level. The MFIs are generally constrained in
reaching a break-even level and finally achieving sustainability, primarily due to a narrow client and product
base, high operational and administrative costs for delivering credit to the poor, and their inability to mobilize
requisite resources. Moreover, lack of technical manpower, operational systems, infrastructure and MIS are
prevalent. In view of the above, to scale up micro-finance initiatives at a faster pace, a special effort is required
for capacity building of the Micro Finance Institutions. In this background, SFMC has in the past under the
DFID collaboration (which has since come to an end on March 31,2009) provided need based capacity building
support to the partner MFIs, in the initial years, to enable them to expand their operations, cover their
managerial, administrative and operational costs besides helping them achieve self-sufficiency in due course.
2. Liquidity Management: In view of the fact that liquidity is a major concern of many of the middle level MFIs
and a small working capital support can go a long way in their better liquidity management and thus pave way
for faster growth, SFMC has introduced a special short term loan scheme, Liquidity Management Support
(LMS) for the long term partners.
3. Equity: Provision of equity capital to the NBFC-MFIs is perceived as an emerging requirement of the micro
finance sector in India. SIDBI provides equity capital to eligible institutions not only to enable them to meet the
capital adequacy requirements but also to help them leverage debt funds. Keeping in tune with the sect oral
requirements, the bank has also introduced quasi-equity products viz., optionally convertible Preference share
capital; optionally convertible debt and optionally convertible Subordinate debt for new generation MFIs which
are generally in the pre-breakeven stage requiring special dispensation for capital support by way of a mix of
Tier I and Tier II capital.
4. Transformation Loan:The Transformation Loan (TL) product is envisaged as a quasi-equity type support to
partner MFIs that are in the process of transforming themselves / their existing structure into a more formal and
regulated set-up for exclusively handling micro finance operations in a focused manner.
Being quasi-equity in nature, TL helps the MFIs not only in enhancing their equity base but also in leveraging
loan funds and expanding their micro credit operations on a sustainable basis. The product has the feature of
conversion into equity after a specified period of time subject to the MFI attaining certain structural, operational
and financial benchmarks. This non-interest bearing support facilitates the young but well performing MFIs to
make long term institutional investments and acts as a constant incentive to transform themselves into formal
and regulated entities.
5. Micro Enterprise Loans: In order to build and strengthen new set of intermediaries for Micro Enterprise
Loans, the Bank has formulated new scheme for Micro Enterprise Loans. Institutions/ MFIs with minimum fund
requirement of Rs. 25 lakh p.a. and having considerable experience in financial intermediation/ facilitating or
setting up of enterprises/ providing escort services to SSI/ tiny units/ networking or active interface with SSIs
etc. and having professional expertise and capability to handle on-lending transactions shall be eligible under
the dispensation. The institutions would be selected based on their relevant experience, potential to expand,
|Page 25

26. professional management, transparency in operations and well laid-out systems besides qualified/ trained
manpower.
Lending to be based strictly on an intensive in-house appraisal supplemented with the credit rating by an
independent professional agency. Relaxed security norms more or less on line with micro credit dispensation
to be adopted to reduce procedural bottlenecks as well as to facilitate easy disbursements.
6. Loan Syndication: Keeping in view the increased fund requirement of major partner MFIs, the Bank has
also undertaken fee based syndication arrangement where loan requirement is comparatively higher.
7. Microfinance Operations:
a. Marketing Strategy and Microfinance Clients Targeting Methodology.
b. Microfinance Products, Services and Lending Procedures.
c. Microfinance Lending Methodology: Individual and Group Lending.
d. Micro finance Indian Lending Methodology.
e. Institutional Business Planning for Microfinance Program6. Financial Planning & Analysais.
f. Savings and Credit Management.
g. Program Operational Policies and Procedures.
h. Accounting and Record Keeping.
i. Auditing for Microfinance Operation.
j. Management Information System.
k. Branch Manager Leadership Training: Managing, Controlling, and Reporting Tools.
l. Detection of Fraud and Internal Control.
m. Monitoring and Supervision System.
n. Delinquencies and its Management.
I. Clients of micro finance:
The typical micro finance clients are low-income persons that do not have access to formal financial
institutions. Micro finance 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, micro finance activities are more
diverse and include shopkeepers, service providers, artisans, street vendors, etc. Micro finance
clients are poor and vulnerable non-poor who have a relatively unstable source of income.
a. The six principles of client protection are:
|Page 26

27. 1. Avoidance of Over-Indebtedness: Providers will take reasonable steps to ensure that credit will be
extended only if borrowers have demonstrated an adequate ability to repay and loans will not put the
borrowers at significant risk of over-indebtedness. Similarly, providers will take adequate care that non-
credit, financial products, such as insurance, provided to low-income clients are appropriate.
2. Transparent and Reasonable Pricing: The pricing, terms and conditions of financial products
(including interest charges, insurance premiums, all fees, etc.) are transparent and will be adequately
disclosed in a form understandable to clients.
3. Appropriate Collections Practices: Debt collection practices of providers will not be abusive or
coercive.
4. Ethical Staff Behavior: Staff of financial service providers will comply with high ethical standards in
their interaction with microfinance clients and such providers will ensure that adequate safeguards are
in place to detect and correct corruption or mistreatment of clients.
5. Mechanisms for Redress of Grievances: Providers will have in place timely and responsive
mechanisms for complaints and problem resolution for their clients.
6. Privacy of Client Data: The privacy of individual client data will be respected, and such data cannot
be used for other purposes without the express permission of the client (while recognizing that
providers of financial services can play an important role in helping clients achieve the benefits of
establishing credit histories).
J. Social performance measurement:
The Social Performance Task Force defines social performance as: "The effective translation of an institution's
social mission into practice in line with accepted social values that relate to serving larger numbers of poor and
excluded people; improving the quality and appropriateness of financial services; creating benefits for clients;
and improving social responsibility of an MFI.”Most MFIs have a social mission that they see as more basic
than their financial objective, or at least co-equal with it. There is a great deal of truth in the adage that
institutions manage what they measure.
Social performance measurement helps MFIs and their stakeholders focus on their social goals and judge how
well they are meeting them. Social indicators are often less straightforward to measure, and less commonly
used than financial indicators that have been developed over centuries. Today’s increasing use of social
measures reflects an awareness that good financial performance by an MFI does not automatically guarantee
client interests are being appropriately advanced.
12. Critical Analysis
A. MFIs Critical Issues: MFIs can play a vital role in bridging the gap between demand & supply
of financial services if the critical challenges confronting them are addressed.
Sustainability: The first challenge relates to sustainability. It has been reported in literature that the MFI model
is comparatively costlier in terms of delivery of financial services. An analysis of 36 leading MFIs2 by Jindal &
Sharma shows that 89% MFIs sample were subsidy dependent and only 9 were able to cover more than 80%
of their costs. This is partly explained by the fact that while the cost of supervision of credit is high, the loan
volumes and loan size is low. It has also been commented that MFIs pass on the higher cost of credit to their
clients who are ‘interest insensitive’ for small loans but may not be so as loan sizes increase. It is, therefore,
necessary for MFIs to develop strategies for increasing the range and volume of their financial services.
|Page 27

28. Lack of Capital: The second area of concern for MFIs, which are on the growth path, is that they face a
paucity of owned funds. This is a critical constraint in their being able to scale up. Many of the MFIs are socially
oriented institutions and do not have adequate access to financial capital. As a result they have high debt
equity ratios. Presently, there is no reliable mechanism in the country for meeting the equity requirements of
MFIs. As you know, the Micro Finance Development Fund (MFDF), set up with NABARD, has been augmented
and re-designated as the Micro Finance Development Equity Fund (MFDEF). This fund is expected to play a
vital role in meeting the equity needs of MFIs.
Borrowings: In comparison with earlier years, MFIs are now finding it relatively easier to raise loan funds from
banks. This change came after the year 2000, when RBI allowed banks to lend to MFIs and treat such lending
as part of their priority sector-funding obligations. Private sector banks have since designed innovative
products such as the Bank Partnership Model to fund.
Source: Issues in Sustainability of MFIs, Jindal & Sharma.
Top 14 Microfinance Institutions in India by Growth of Number of active Borrowers.
|Page 28

29. B. Problems for Alternative Micro-Finance Institutions: The main aim with which the alternative
MFIs have come up is to bridge the increasing gap between the demand and supply. A vast
majority of them set up as NGOs for getting access to funds as, the existing practices of
mainstream financing institutions such as SIDBI and NABARD and even of the institutions
specially funding alternatives, such RMK and FWWB, is to fund only NGOs, or NGO promoted
SHGs. As a result, the largest incentive to enter such services remains through the nonprofit
route. The alternative finance institutions also have not been fully successful in reaching the
needy.
There are many reasons for this:
1. Financial problems leading to setting up of inappropriate legal structures.
2. Lack of commercial orientation.
3. Lack of proper governance and accountability.
4. Isolated and scattered.
C. Risk: This looks at the quality of their loan portfolio measured as the percent of the portfolio at risk
greater than 30 days. And return, which is measured as a combination of return on equity and return on assets.
From this above table we can notice that the Risk of companies is measured as the percentage of
Portfolio at Risk (PAR) which means and returns is measured as a combination of ROA and ROE.
Return on Assets (ROA): A Return on Assets is an indication of how well an MFI is managing its asset base
to maximize its profits. The ratio does not evaluate the source of the asset base – whether through debt or
equity, but simply the return of the portfolio and other revenue generated from investments and operations. A
return on assets should be positive. There is a positive relationship between Return on Assets and the Portfolio
to Assets ratio discussed in the next section. MFIs that maintain most of their assets in the loan portfolio tend
to break even sooner, and generate higher returns on their assets; provided the loan portfolio performs well
and other costs are also controlled.
Return on Assets = Net Operating Income – Taxes____
Average Assets
Trend: An increasing Return on Assets is positive.
Return on Assets (ROA) indicates how well an MFI is managing its assets to optimize its
profitability. The ratio includes not only the return on the portfolio, but also all other revenue
generated from investments and other operating activities.
From the above list we can notice that, there are seven companies of India in top 50 companies
in the world. There is a huge potential for India to grow in this sector, because out of total 500
million poor people from all over the world, who is getting beneficial from the micro finance
institutions, 80 to 90 million are from India only. So there is still a huge market and
opportunities in this segment.
The total loan that the MFI‘s had provided to the poor people in India crosses Rs 24 billion till
October 08. And this is only 40% of the total poor. If this turns into 100%, then we will see the new face of
India.
|Page 29

30. Return on Equity: A Return on Equity is probably one of the most important profitability indicators for
commercial banks and MFIs, particularly in comparison with other institutions. The return is measured only in
relation to what the MFI has built from operating surpluses, or what it has generated through donations or other
contributed sources. The shareholders of a for-profit MFI or bank, is very interested in this ratio, as it is a
measure of their investment choice, and its ability to pay dividends. Increasing equity also strengthens the
MFI’s capital structure and its ability to leverage debt financing. As markets mature and competition increases,
Return on Equity may level off and maintain a positive position without increasing dramatically or at all.
Return on Equity = Net Operating Income – Taxes____
Average Equity
Trend: An increasing Return on Equity is positive.
H. Risk Management: Risk management is a discipline for dealing with the possibility that some
future event will cause harm. It provides strategies, techniques, and an approach to
recognizing and confronting any threat faced by an organization in fulfilling its mission. Risk
management may be as uncomplicated as asking and answering three basic questions:
Major Risks to Microfinance Institutions:
Financial Risks Operational Risks Strategic Risk
Credit Risk Transaction Risk Governance Risk
Transaction risk
Portfolio risk Human resources Risk Ineffective oversight
Liquidity Risk Information & technology Poor governance
Market Risk Risk structure
Interest rate risk Fraud (Integrity) Risk Reputation Risk
Foreign exchange risk Legal & Compliance External Business
Investment portfolio risk Risks
Risk
Event risk
Sources: - www. Scribd.com
This are the most significant risks (with the most potentially damaging consequences for the
MFI), how they interact, and current challenges faced by MFIs.
a. Financial Risks: Most MFIs focus on financial risks, including credit, liquidity, Interest rate, and
investment risks. Mentioned under are the risks which are very critical for the MFI‘s.
1. Credit risk: Credit risk, the most frequently addressed risk for MFIs, is the risk to earnings or
capital due to borrowers’ late and non-payment of loan obligations. Credit risk encompasses
both the loss of income resulting from the MFI‘s inability to collect anticipated interest earnings
as well as the loss of principle resulting from loan defaults. Credit risk includes both transaction
risk and portfolio risk.
|Page 30

31. 2. Transaction risk: Transaction risk refers to the risk within individual loans. MFIs mitigate
transaction risk through borrower screening techniques, underwriting criteria, and quality
procedure for loan disbursement, monitoring, and collection.
3. Portfolio risk: Portfolio risk refers to the risk inherent in the composition of the overall loan
portfolio. Policies on diversification, maximum loan size, types of loans, and loan structures
lessen the portfolio risk.
4. Liquidity risk: Liquidity risk is the ―risk that an MFI cannot meet its obligations on a timely basis
Liquidity risk usually arises from management‘s inability to adequately anticipate and plan for
changes in funding sources and cash needs.
Efficient Liquidity Management requires maintaining sufficient cash reserves on hand (to meet client
withdrawals, disburse loans and fund unexpected cash shortages) while also investing as many funds as
possible to maximize
earnings. Liquidity management is an ongoing effort to strike a balance between having too much cash and too
little cash.
5. Interest rate risk: Interest rate risk is the risk of financial loss from changes in market interest
rates. The greatest interest rate risk occurs when the cost of funds goes up faster than the
financial institution can or is willing to adjust its lending rates.
Manage interest rate risk: To reduce the mismatch between short-term variable rate liabilities and long-term
fixed rate loans, managers may refinance some of the short-term borrowings with long-term fixed rate
borrowings. This might include offering one and two-year term deposits as a product and borrowing five to 10
year funds from other sources. Such a step reduces interest rate risk and liquidity risk, even if the MFI pays a
slightly higher rate on those funding sources.
To boost profitability, MFIs may purposely ―mismatch assets and liabilities in anticipation of changes in
interest rates. If the asset liability managers think interest rates will fall in the near future, they may decide to
make more long-term loans at existing fixed rates, and shorten the term of the MFI‘s liabilities. By lending long
and borrowing short, the MFI can take advantage of the cheaper funding in the future, while locking in the
higher interest rates on the asset side. In this case, the MFI has increased the interest rate risk in the hope of
improving the profitability of the bank.
b. Operational Risks: Operational risk arises from human or computer error within daily service or
product delivery. This risk includes the potential that inadequate technology and information systems,
operational problems, insufficient human resources, or breaches of integrity (i.e. fraud) will result in
unexpected losses.
Two types of operational risk: transaction risk and fraud risk:
1. Transaction risk: Transaction risk is particularly high for MFIs that handle a high volume of
small transactions daily. Since MFIs make many small, short-term loans, this same degree of
cross-checking is not cost-effective, so there are more opportunities for error and fraud. As more
MFIs offer additional financial products, including savings and insurance, the risks multiply and
should be carefully analyzed as MFIs expand those activities
2. Fraud risk: Fraud risk is the risk of loss of earnings or capital as a result of intentional deception
by an employee or client. The most common type of fraud in an MFI is the direct theft of funds
by loan officers or other branch staff. Other forms of fraudulent activities include the creation of
misleading financial statements, bribes etc.
Minimize fraud risk: To introduced an education campaign to encourage clients to speak out against corrupt
staff and group leaders. This standardized all loan policies and procedures so that the staff cannot make any
decision outside the regulations. To Established an inspection unit that performs random operational checks.
|Page 31

32. c. Strategic Risks: Strategic risks include internal risks like those from adverse business decisions or
improper implementation of those decisions, poor leadership, or ineffective governance and oversight,
as well as external risks, such as changes in the business or competitive environment.
This section focuses on two critical strategic risks: Governance Risk, Business Environment Risk.
1. Governance risk: Governance risk is the risk of having an inadequate structure or body to make
effective decisions. The Financial crisis, described above illustrates the dangers of poor governance
that nearly resulted in the failure of that institution.
2. External business environment risk: Business environment risk refers to the inherent risks of the
MFI‘s business activity and the external business environment. To minimize business risk, the
microfinance institution must react to changes in the external business environment to take advantage
of opportunities, to respond to competition, and to maintain a good public reputation.
MFI manage their repayment and risk management: Risk is an integral part of financial services. When
financial institutions issue loans, there is a risk of borrower default. When banks collect deposits and on-lend
them to other clients (i.e. conduct financial intermediation), they put clients’ savings at risk. Most MFIS‘s
provides the loans without or with smaller portion of deposit or, so for them repayment of interest or principal is
very risky. All MFI‘s face risks that they must manage efficiently and effectively to be successful. When poorly
managed risks begin to result in financial losses, donors, investors, lenders, borrowers and savers tend to lose
confidence in the organization and funds begin to dry up. When funds dry up, an MFI is not able to meet its
social objective of providing services to the poor and quickly goes out of business.
d. Benefit of Risk Management: Early warning system for potential problems: A systematic process for
evaluating and measuring risk identifies problems early on, before they become larger problems or
drain management time and resources. Less time fixing problems means more time for
production and growth. Better information on potential consequences, both positive and negative. A
proactive and forward-thinking organizational culture will help managers identify and assess new
market opportunities, foster continuous improvement of existing operations, and more effectively
performance incentives with the organization‘s strategic goals. Encourages cost-effective decision-
making and more efficient use of resources.
e. Interest Rates: Most MFI’s financially sustainable by charging interest rates that are high enough to
cover all their costs.
Four key factors determine these rates:
•The cost of funds.
•The MFI's operating expenses.
•Loan losses.
•And profits needed to expand their capital base and fund expected future growth.
There are three kinds of costs the MFI has to cover when it makes micro loans:
•The cost of the money that it lends.
•The cost of loan defaults.
•Transaction and Operating cost.
For instance, MFI lends is 10 percent, and it experiences defaults of 1 percent of the amount lent,
then total Rs 11 for a loan of Rs 100, and Rs 55 for a loan of Rs 500. And the third cost i.e.
transaction cost.
The interest rates are deregulated not only for private MFIs but also for formal baking sector. In the context of
softening of interest rates in the formal banking sector, the comparatively higher interest rate (12 to 24 per cent
per annum) charged by the MFIs has become a contentious issue. The high interest rate collected by the MFIs
from their poor clients is perceived as exploitative. It is argued that raising interest rates too high could
undermine the social and economic impact on poor clients. Since most MFIs have lower business volumes,
their transaction costs are far higher than that of the formal banking channels. The high cost structure of MFIs
would affect their sustainability in the long run.
|Page 32

33. MFI being criticized because of high interest rate:Most MFI‘s financially sustainable by charging interest
rates that are high enough to cover all their costs. The problem is that the administrative costs are inevitably
higher for tiny micro lending than for normal bank lending. As a result, interest rates in sustainable
microfinance institutions (MFIs) are substantially higher than the rates charged on normal bank loans.
Four key factors determine these rates:
1. The cost of funds,
2. the MFI's operating expenses,
3. Loan losses,
4. And profits needed to expand their capital base and fund expected future growth.
Formula to decide the interest rate is:
R = AE + LL + CF + K - II
1– LL
Where AE is administrative expenses, LL is loan losses, CF is the cost of funds, K is the desired Capitalization
rate and II is investment income.
Example:
Suppose that the transaction cost is Rs 15 per loan and that the loans are for one year. To break even on the
Rs 500 loan, the MFI would need to collect interest of Rs 50 + Rs 5 + Rs 15 = Rs 70, which represents an
annual interest rate of 13 percent. To break even on the Rs 100 loan, the MFI would need to collect interest of
Rs 10 +Rs 1 + Rs 15 = Rs 26, which is an interest rate of 26 percent.
f. SWOT Analysis:
SWOT stands for Strength, Weakness, Opportunity, and Threat.
Strength
• Helped in reducing the poverty: The main aim of Micro Finance is to provide the loan to the individuals
who are below the poverty line and cannot able to access from the commercial banks. As we know that Indian,
more than 350 million people in India are below the poverty and for them the Micro Finance is more than the
life. By providing
small loans to this people Micro finance helps in reducing the poverty.
• Huge networking available: For MFIs and for borrower, both the huge network is there. In India there are
many more than 350 million who are below the poverty line, so for MFIs there is a huge demand and network
of people. And for borrower there are many small and medium size MFIs are available in even remote areas.
Weakness
• Not properly regulated: In India the Rules and Regulation of Micro Finance Institutions are not regulated
properly. In the absent of the rules and regulation there would be high case of credit risk and defaults. In the
shed of the proper rules and regulation the Micro finance can function properly and efficiently.
• High number of people access to informal sources: According to the World Bank report 80% of the Indian
poor can‘t access to formal source and therefore they depend on the informal sources for their borrowing and
that informal charges 40 to 120% p.a.
• Concentrating on few people only: India is considered as the second fastest developing country after
China, with GDP over 8.5% from the past 5 years. But this all interesting figures are just because of few
people. India‘s 70% of the population lives in rural area, and that portion is not fully touched.
Opportunity
• Huge demand and supply gap: There is a huge demand and supply gap among the borrowers and
issuers. In India around 350 million of the people are poor and only few MFIs there to serving them.
|Page 33

34. There is huge opportunity for the MFIs to serve the poor people and increase their living standard. The annual
demand of Micro loans is nearly Rs 60,000 crore and only 5456 crore are disbursed to the borrower.( April 09)
Employment Opportunity:
Micro Finance helps the poor people by not only providing them with loan but also helps them in their business;
educate them and their children etc.
So in this Micro Finance helping in increase the employment opportunity for them and for the society.
• Huge Untapped Market: India‘s total population is more than 1000 million and out of 350 million is living
below poverty line. So there is a huge opportunity for the MFIs to meet the demand of that unsaved customers
and Micro Finance should not leave any stones unturned to grab the untapped market.
• Opportunity for Pvt. Banks: Many Pvt. Banks are shying away from to serve the people are unable to
access big loans, because of the high intervention of the Govt. but the door open for the Pvt. Players to get
entry and with flexible rules Pvt. Banks are attracting towards this segment.
Threat
• High Competition: This is a serious threat for the Micro Finance industry, because as the more players
will come in the market, their competition will rise , and we know that the MFIs has the high transaction cost
and after entrant of the new players there transaction cost will rise further, so this would be serious threat.
• Neophyte Industry: Basically Micro Finance is not a new concept in India, but that was all by informal
sources. But the formal source of finance through Micro Finance is novice, and the rules are also not properly
placed for it.
• Over involvement of Govt.: This is the biggest that threat that many MFIs are facing. Because the excess
of anything is injurious, so in the same way the excess involvement of Govt. is a serious threat for the MFIs.
Excess involvement definition is like waive of loans, make new rules for their personal benefit etc.
13. Micro-Finance Accounting and Management Information Systems
The basic components of an accounting system are fairly universal and applicable to all org Source documents
form the basis of all transactions. A Chart of Accounts is a numbered system that is structured to Classify and
organize transactions by account. The journals cash journals, general journals, or bank journals record each
and every transactions or adjustment. They are summarized monthly, cross-totaled and posted to the general
ledger. The general ledger holds a record for each account in the Chart of Accounts. It accumulates the totals
posted from the journals to provide monthly and annual revenue and expenses for reporting periods. It
accumulates all the accounts of the Balance Sheet.
These accounting records and processes form the basis of all accounting systems. Most MFIs choose
computerized. The following diagram illustrates a “generic” financial management information system in a
microfinance institution, whether its clients are individuals, Self Help Groups, Solidarity Groups, or Joint
Liability Groups, and regardless of its legal structure or registration. The accounting system follows the usual
flow from transaction to the parathion of financial statements. One of the most distinctive aspects of the
accounting system for microfinance institutions is that financial and operational activity must be tracked by
Branch. Loan information should also be tracked by Credit Officer, by product and by area if needed. This is
critical for internal management & monitoring.
Another distinctive aspect of accounting for MFIs is that the loan tracking system for client transactions acts as
a subsidiary ledger. Client transactions must be entered into both systems, but can be summarized in the
accounting general ledger. Some loan tracking systems are manual, but it is a huge challenge to handle a
large number of clients, produce reports &age loans with great efficiency in a manual system. Most MFIs prefer
automated systems, particularly loan tracking systems that are integrated with, and linked to a general ledger.
The following diagram shows the connection between the two systems.
|Page 34

35. Accounting System and Client Portfolio System (MIS) Microfinance
The MFI financial management systems illustrated dose not operates in a vacuum. There are four
distinct areas that guide & govern a well-managed & effective financial system.
A. Portfolio Report:
Is it a number reflecting a period of time (e.g. the Income Statement, and some numbers from the Portfolio
Report)? Is the number reflective of information from a point in time – as from the Balance Sheet? When
Income Statement numbers or any number reflecting a period of activity is used to calculate a ratio, the second
component of the ratio must also reflect a period of activity. Therefore, some of the ratio components take the
average of Balance Sheet numbers. Remember to note these distinctions in the ratio calculations.
*14 MFI in India Growth of Gross Loan Portfolio
|Page 35

36. B. Asset and Liability Management
Yield = Cash Received from Interest, Fees and Commissions on Loan Portfolio___
Average Gross Loan Portfolio
Trend: An increasing yield is positive although it will level off as it nears the effective interest rate.
a. Basic Financial Management and Ratio Analysis for MFIs:
MFI stakeholders expect MFI senior managers to ensure that strong and adequate financial systems are in
place in the MFI. Therefore, it is essential that MFI managers have a solid understanding and appreciation of
the financial and accounting systems.
The Basic Financial Management and Ratio Analysis for MFIs offer a practical training in basic financial
management and ratio analysis for MFIs. It provides an overview of the key aspects of accounting in
microfinance institutions describes the primary financial statements and portfolio reports of MFIs and describes
the commonly accepted financial ratios used for monitoring, reporting and measuring MFI performance.
Performance ratios cover four general areas of MFI operations: sustainability or profitability, asset and liability
management, portfolio quality and productivity and efficiency.
Its helps develop clarity on the need of the different financial statements, the relation between them. The
training helps develop skills to analyze these statements and calculate different ratios which will give the
correct picture on the financial health of the organization. This is done through supporting documents,
diagrammatic representations, and exercises.
Financial ratios are useful indicators of a firm's performance and financial situation. Financial ratios can be
used to analyze trends and to compare the firm's financials to those of other firms.
b. List of MFI’s and their key Ratios:
Liquidity Ratios
These ratios actually show the relationship of a firm‘s cash and other current assets to its current liabilities.
Two ratios are discussed under Liquidity ratios. They are:
1. Current ratio
2. Quick/ Acid Test ratio.
1. Current ratio: This ratio indicates the extent to which current liabilities are covered by
those assets expected to be converted to cash in the near future. Current assets normally include
cash, marketable securities, accounts receivables, and inventories. Current liabilities consist of
accounts payable, short-term notes payable, current maturities of long-term debt, accrued taxes,
and other accrued expenses (principally wages).
Current Ratio=Current Assets/Current Liabilities.
|Page 36