A report

On

MICRO FINANCE (ITS LIMITATIONS AN OPPORTUNITIES)

BY

NISHANT BALI

INTERFACE BROKERAGE AND RESEARCH LIMITED

ENROLLMENT NO :( 08BS0000711)

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 A report

On

MICRO FINANCE (ITS LIMITATIONS AN OPPORTUNITIES)

COMPANY GUIDE:

NAME: MR. HIMAL PARIKH

(DIRECTOR) INTERFACE BROKERAGE AND RESEARCH LTD

FACULTY GUIDE:

NAME: MR. SUNIL ARORA

(FACULTY OF FINANCE)

ICFAI BUSINESS SCHOOL, AHMEDABAD

NISHANT BALI

ICFAI BUSINESS SCHOOL, AHMEDABAD

ENROLLMENT NO.: 08BS0000711

Email ID: [email protected]

CONTACT NO. 9898399031.

The report is submitted as partial fulfillment of the

Requirement of MBA Program of IBS

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 Acknowledgements

“No good work flows without the help from Faculty Members

Industrial Professionals, Colleagues, Organization and Friends”

First of all I would like to thank Mr. Himal Parikh (M.D. , Director,
Interface Brokerage and Research Ltd.) for providing me an opportunity to work
in their team as summer trainee.

I would also like to thank Mr. Hitesh Patel, Mr. Darshan Panchal and Ms.
Jamini; employees of the company working in research department for their
invaluable guidance, Cooperation and encouragement which helped me lot in my
Summer Training.

I am also thankful to my faculty in-charge Pof. Sunil Arora for his

guidance and valuable input and advice during my project.

I am also thankful to Mr. Sanjiv Rohilla (Asst. General Manager)

NABARD, Mr. Arvind Parmar (Operation Manager) SAKHI, and Mr. Mukesh
Gandhi (Director) Mass Financing, for their invaluable guidance and helped me
in understanding my topic in depth.

At the last, I would like to thank each individual who some or other way
helped me to complete my project.

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  ABSTRACT of the Project:

Micro-Finance refers to ―small savings, credit and insurance services extended to

socially and economically disadvantaged segments of society, for enabling them to raise their
income levels and improve living standards‖. The main aim of Micro-Finance is too provide loan
to the poor people or to below poverty line, who are not able borrow from other sources and to
make their living standard better.

Micro- finance‘s concept was first given by the Nobel laureate Prof. Mohammad Yunus in
1976 and started Grameen Bank in that year and from then many countries has followed
Grameen Bank Model. It is not possible to cover each and every aspect of Micro Finance in this
short duration of time. But I have tried to cover main and the basics of Micro Finance. Through
this report any person who doesn‘t anything about Micro Finance can easily understands and
makes decision on his own.

In this report I have tried to cover each and every important part related to the Micro
Finance Sector i.e. Business Model of Grameen Bank, SHG‘s and how they formed, role of Micro
Finance in the current economy, study about their interest rates, role of women in the economy,
how the product is design, interview of NABARD executive and understand the Business Model
of NABARD, and many important things related to Micro Finance.

After successfully completion of my project, I understood many areas of Micro Finance.

Like how a company decides their interest rate, practically how SHGs formed, how the excess of
government intervention can create disaster for the MFIs, practically felt, how a Micro loan can
change the life of the individuals. Practical learning of Micro Finance industry by personal visits
the institutions and prepared the business model of the same.

Now I can confidently say that, with zero percentage o to 70 percentage knowledge in the
field of Micro finance in just three months, it‘s like Achievement for me and I will add this
moment in my Achievements lists. What I feel that, in this short period of time its difficult to
understand the 100 percentage of the above mentioned subject. But at last I am satisfied with
my performance.

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 TABLE OF CONTENTS

ACKWOLEDGEMENT ………………………………………………………………………. 3

ABSTRACT …………………………………………………………………………………………………….. 4

Overview of the Microfinance Sector …………………………………………………………… 10

Top 50 Microfinance Institutions ………………………………………………………………… 12

Legal and Regulatory Framework for the (MFI’s) in India ………………………… 15

Societies Registration Act, 1860 …………………………………………………………… 15

Indian Trusts Act, 1882 ………………………………………………………………………. 15

Not-For-Profit Companies Registered Under Section 25 Of Companies Act,
1956………………………………………………………………………………………………….. 15

Ratio Analysis............................................................................................................... 16

Micro credit model ………………………………………………………………………………………… 20

Business Model of GRAMEEN Bank …………………………………………………………….. 21

About GRAMEEN Bank ………………………………………………………………………. 21

Working model of Grameen bank ………………………………………………………… 22
16 Decisions ……………………………………………………………………………………….. 24
The Repayment Mechanism …………………………………………………………………. 25
Criticism of Grameen Bank ……………………………………………………………………25

Self Help Group (SHG’s) ……………………………………………………………………….…,……26

Concept of SHGs ………………………………………………………………………….….…. 26

Need of SHG‘s ……………………………………………………………………………….…… 26

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 Structure of SHGs ………………………………………………………………………………. 27

Joint Liability Groups (JLGs)......................................................................31

Difference between SHGs and JLGs ……………………………………………………… 31

How JLGs formed ……………………………………………………………………………. …32
JLG features ……………………………………………………………………………………… .32

NABARD Initiative in Micro Finance ……..…………………………………………………….. 33

Introduction ………………………………………………………………………………………. 33
Role of NABARD …………………………………………………………………………………. 33
Organization Structure …………………………………………………………………………34
NABARD‘s OFFICES all over INDIA ………………………………………………………34
Financial Santa Clause NABARD ……………………………………………………………35
How NABARD helps Banks and MFI‘s in augmenting? …………………………….35
How NABARD manages their repayment ratio ………………………………………. 36
How NABARD gives loan to the Institutions? ………………………………………….36

Business Model of SAKHI ………………………………………………………………………………. 37

Introduction ……………………………………………………………………………………….. 37
Organization Structure …………………………………………………………………….…. 38
How SAKHI disburse the Loans? ………………………………………………………..…. 39
How they charges interest? ………………………………………………………………..…. 40
How SAKHI raise capital? …………………………………………………………………..… 40
Why SAKHI charges such a high rate of interest (18% p.a)? …………………..... 40
Is government waiver plan effected there Institution? ………………………….… 41

Business Model of MAS Finance ……………………………………………………………………. 43

Introduction …………………………………………………………………………………….… 43
Role and Function ………………………………………………………………………………. 43
Organization Structure ……………………………………………………………………… 44
How MAS FINANCE raise capital? ………………………………………………………..45
How MAS FINANCE manages their repayment structure ………………………. 45
MAS FINANCE has strange way of providing loan? ……………………………….. 45
Why MAS FINANCE charges such a high rate of interest (25-26%% p.a)? … 45
Any default case regarding to repayment of the loan? ……………………………..45

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Credit institutions as a Political tool: Debt relief in India ………………………. .46

Product Design ……………………………………………………………………………………………. .48

How MFI’s manage their repayment and Risk management …………………. ….49

What is Risk Management? ………………………………………………………………….49

Benefit of Risk Management ………………………………………………………………..49
Financial Risks ……………………………………………………………………………………51
Liquidity risk …………………………………………………………………………………. …..52
Operational Risks ………………………………………………………………………………..53
Strategic Risks …………………………………………………………………………………….53

Why micro finance provides loan to the women only ………………………………… 55

Why MFI‘s being critized for providing loans to the women only? …………….55

How the recent slowdown affects the MFI’s …………………………………………………..57

How the MFI‘s find opportunities within the crisis ………………………………..…58

MFI’s being criticized because of high interest rate …………………………………...59

Why Microcredit Rates are so high? ………………………………………………….…..59

Inappropriate comparison …………………………………………………………………...60
Rate Ceilings: Not the Answer ……………………………………………………………. ..61

SWOT Analysis of micro finance ……………………………………………………………….… 64

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SKS Case study………………………………………………………………………………...66

Development of Organization ……………………………………………………………. 66

Sources of Capital ……………………………………………………………………..……… 66
Organization & Management Analysis ………………………………………………… 68

Interview of end users …………………………………………………………………………….……70

Future of Micro Finance……………………………………………………………….……72

Recommendations and Suggestions ……………………………………………….… 74

Conclusion ………………………………………………………………………………….…..75

References …………………………………………………………………………………………….…......76

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 List of Illustration (Figures)

Top fifty MFIs (Micro Finance Institutions) ………………………………………………….….12

Comparison among the Companies ……………………………………………………………….…18

Comparative Analysis of Microfinance Services Offered To the Poor …………………..28

Year wise increase of SHG‘s and their finance …………………………………………….…....29

Growth of linked SHG's in 13 Priority States ……………………………………………………..30

Organizational structure of NABARD …………………………………………………………….…34

NABARD‘s offices all over India ………………………………………………………………….…...34

Organization Structure of SAKHI ………………………………………………………………….…38

Business plan projection of SAKHI ……………………………………………………….………….41

Projected balance sheet of SAKHI ………………………………………………………….…….....42

Organization Structure of MAS Finance ……………………………………………………………44

The Corposol/Finansol Crisis …………………………………………………………….….………..50

Major Risks to Microfinance Institutions ………………………………………………………….51

General Impact of Ceilings on Microcredit Interest Rates …………………………………..62

Operation and Financial function of SKS………………………………………………………… …67

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Overview of the Microfinance Sector

Micro-finance refers to ―small savings, credit and insurance services extended to socially and
economically disadvantaged segments of society, for enabling them to raise their income levels
and improve living standards‖. India‘s population is more than 1000 million, and it‘s the second
largest in term of population after China. India's GDP ranks among the top 15 economies of the
world. However, around 300 million people or about 80 million households, are living below the
poverty line, i.e. less than $2 per day according to the World Bank and the poorest are which
earns $1 per day . It is further estimated that of these households, only about 20% have access to
credit from the formal sector. Out of these 80 million house hold, 80% takes credit from the
informal sources i.e. local Zamidars, Chit Funds etc. With about 80 million households below
poverty line and 80% out of this is access from informal sector, so it‘s obvious to solve this
problem and this gave birth to Micro Finance Institutions (MFI‘s). MFIs include non-
governmental organizations (NGOs), credit unions, non-bank financial intermediaries, and even
a few commercial banks.

India has about 153,000 retail outlets of the formal banking infrastructure—commercial
banks…There are about 33,000 banks in rural areas, and also have special category of banks
called regional rural banks, in the abbreviated form, RRBs. There are about 14,500 branches
and the cooperatives…The cooperatives—about 100,000 retail outlets…the population for the
regional outlet comes down to as low as 4,700. Annual credit demand by the poor in the country
is estimated to be about Rs 60,000 crores.

In the Indian context terms like "small and marginal farmers", " rural artisans" and
"economically weaker sections" have been used to broadly define micro-finance customers.
Women constitute a vast majority of users of micro-credit and savings services. In short, Micro
Finance means providing very poor families with very small loans to help them engage in
productive activities or grow their very small businesses.

It is firstly (and this is essential) a tool in the fight against poverty. It is not for poor people in
general but for poor people who are considered to be economically active, in other words, those
who carry out activities which generate revenues which in turn allow them to cover their needs
and those of their families, even if these revenues are low and precarious. Microfinance offers to
help them get started by giving them access to financial services from which they are generally
excluded (including savings and credit facilities, insurance and fund transfers), and in ways that
are suited to their economic and management skills.

Ultimately, the goal of microfinance is to give low income people an opportunity to become self-
sufficient by providing a means of saving money, borrowing money and insurance.

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Micro financing is not a new concept. Small microcredit operations have existed since the mid
1700s. Although most modern microfinance institutions operate in developing countries, the
rate of payment default for loans is surprisingly low - more than 90% of loans are repaid. It is
not just a financing system, but a tool for social change, specially for women - it does not spring
from market forces alone - it is potentially welfare enhancing - there is a public interest in
promoting the growth of micro finance - this is what makes it acceptable as a valid goal for
public policy.

Microcredit, Microfinance and Micro plus?

Microcredit refers specifically to loans and the credit needs of clients, while Microfinance covers
a broader range of financial services that create a wider range of opportunities for success.
Examples of these additional financial services include savings, insurance, housing loans and
remittance transfers. The local MFI might also offer Microfinance plus activities such as
entrepreneurial and life skills training, and advice on topics such as health and nutrition,
sanitation, improving living conditions, and the importance of educating children

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Top 50 MICROFINANCE INSTITUTIONS :( as on 20/3/09)

Rank Name Country Risk Returns

1 ASA Bangladesh 56 40
2 Bandhan (Society and NBFC) India 42 1

3 Banco do Nordeste Brazil 213 25

4 Fundación Mundial de la Mujer Colombia 193 1
Bucaramanga
5 FONDEP Micro-Crédit Morocco 196 1
6 Amhara Credit and Savings Ethiopia 118 42
Institution
7 Banco Compartamos, S.A., Mexico 295 11
Institución de Banca Múltiple
8 Association Al Amana for the Morocco 133 1
Promotion of Micro-Enterprises
Morocco
9 Fundación Mundo Mujer Popayán Colombia 141 1
10 Fundación WWB Colombia - Cali Colombia 155 4
11 Consumer Credit Union 'Economic Russia 19 1
Partnership'
12 Fondation Banque Populaire pour Morocco 219 1
le Micro-Credit
13 Microcredit Foundation of India India 7 185
14 EKI Bosnia and 242 1
Herzegovina
15 Saadhana Microfin Society India 73 1
16 Jagorani Chakra Foundation Bangladesh 128 1
17 Grameen Bank Bangladesh 100 62
18 Partner Bosnia and 230 1
Herzegovina
19 Grameen Koota India 156 1
20 Caja Municipal de Ahorro y Crédito Peru 222 119
de Cusco
21 Bangladesh Rural Advancement Bangladesh 126 205
Committee
22 AgroInvest Serbia 222 1
23 Caja Municipal de Ahorro y Crédito Peru 220 101
de Trujillo
23 Sharada's Women's Association for India 55 13
Weaker Section
24 MIKROFIN Banja Luka Bosnia and 205 1
Herzegovina
25 Khan Bank (Agricultural Bank of Mongolia 280 59
Mongolia LLP)
26 INECO Bank Armenia 202 39
27 Fondation Zakoura Morocco 194 1

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28 Dakahlya Businessmen's Egypt 102 1
Association for Community
Development
29 Asmitha Microfin Ltd. India 73 111
30 Credi Fe Desarrollo Ecuador 206 34
Microempresarial S.A.
31 Dedebit Credit and Savings Ethiopia 80 154
Institution
32 MI-BOSPO Tuzla Bosnia and 283 1
Herzegovina
33 Fundacion Para La Promocion y el Nicaragua 171 100
Desarrollo
34 Kashf Foundation Pakistan 219 1
35 Shakti Foundation for Bangladesh 151 1
Disadvantaged Women
36 enda inter-arabe Tunisia 257 1
37 Kazakhstan Loan Fund Kazakhstan 320 1
38 Integrated Development Bangladesh 140 1
Foundation
39 Microcredit Organization Sunrise Bosnia and 341 17
Herzegovina
40 FINCA - ECU Ecuador 264 54
41 Caja Municipal de Ahorro y Crédito Peru 220 215
de Arequipa
42 Crédito con Educación Rural Bolivia 298 1
43 BESA Fund Albania 345 1
44 SKS Microfinance Private Limited India 141 1
45 Development and Employment Jordan 135 1
Fund
46 Programas para la Mujer - Peru Peru 242 1
47 Kreditimi Rural i Kosoves LLC Kosovo 247 1
(formerly Rural Finance Project of
Kosovo)
48 BURO, formerly BURO Tangail Bangladesh 186 91
49 Opportunity Bank A.D. Podgorica Serbia 319 23
50 Sanasa Development Bank Sri Lanka 93 241

Sources: forbes magazine.com

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*Risk, which looks at the quality of their loan portfolios, 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 return is measured as a combination of ROA and
ROE. ROA = Net Operating Income-Taxes

Average Assets

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.

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Legal and Regulatory Framework for the
Microfinance Institutions in India:

1. SOCIETIES REGISTRATION ACT, 1860:

NGOs are mostly registered under the Societies Registration Act, 1860. Since these entities were
established as voluntary, not-for-profit development organizations, their microfinance activities
were also established under the same legal umbrella.

This act is applicable to the NGO‘s and the main purpose is:

Relief of poverty
Advancement of education
Advancement of religion
Purposes beneficial to the community or a section of the community.

2. INDIAN TRUSTS ACT, 1882:

Some MFIs are registered under the Indian Trust Act, 1882 either as public charitable trusts or
as private, determinable trusts with specified beneficiaries/members.

3. NOT-FOR-PROFIT COMPANIES REGISTERED UNDER SECTION 25

OF COMPANIES ACT, 1956:

An organization given a license under Section 25 of the Companies Act 1956 is allowed to be
registered as a company with limited liability without the addition of the words ‗Limited‘ or
‗Private Limited‘ to its name. It is also eligible for exemption from some of the provisions of the
Companies Act, 1956.

For companies that are already registered under the Companies Act, 1956, if the central
government is satisfied that the objects of that company are restricted to the promotion of
commerce, science, art, religion, charity or any other useful purpose; and the constitution of
such company provides for the application of funds or other income in promoting these objects
and prohibits payment of any dividend to its members, then it may allow such a company to
register under Section 25 of the Companies Act.

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RATIO ANALYSIS:

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.

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

S.no Companies As on As on Percentage
31.3.08(%) 31.3.07(%) changed
1. Asmitha Microfinance 18.0 6.81 195%

2. Basix Microfinance 5.65 5.74 1.56%

3. Ujjivan Microfinance 42 98 57%

4. Cashpro Microfinance 17.88% 15.91

5. Trident microfinance 3.33 4.47 25.6%

6. Samridhi Microfinance 16.81 19.36%

Sources :- companies balance sheet

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Explanation:-

Here we can notice that the current ratio of all the MFI‘s. There is a mixed picture i.e.few
company‘s ratio has dipped down and few went up, now we will see, why this so?

Asmitha Microfinance‘s ratio went up by whopping 195% in 2008 compared to 2007.

This was because of the high micro loan to the poor women and high cash and bank
balance. So we can came out of the conclusion that the Asmitha Microfinance has more
current assets then there liabilities to meet there short term obligations.
Basix Microfinance‘s ratio dipped down by mere 1.56% , reason for that there loans to
the poor went up by 61%, but there current liability ( other provision )but went up by
69%.
Ujjivan Microfinance‘s ratio went down by 57%, its cash balance went up by 605 but its
current liabilities went up by 247%.
Cashpro Microfinance‘s has showed the highest percentage change from the previous
year i.e. 205%. Its loan to the women went up by 121% and cash and bank balance by
52% and the current liability went down by 35%.
Trident Microfinance‘s current ratio went down by 26%, because of the high current
liabilities and other provision.

Capital Adequacy ratio:

Capital adequacy ratio is the ratio which determines the capacity of a bank in terms of meeting
the time liabilities and other risk such as credit risk, market risk, operational risk, and others. It
is a measure of how much capital is used to support the banks' risk assets. In short this ratio
used to protect depositors and promote the stability and efficiency.

Under this 2 main ratio is there:

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 Comparison among the Companies

(07-08)
Criteria Asmitha Basix Trident SKS
Microfinance Microfinance microfinance

Capital

Capital To 106.54% 12.63% 44.77% 19.52

Assets ratio

Debts to 89.79% 85.11% 35.79% -

Assets Ratio

Earnings

ROA 1.24% 1.97% -1.92%

ROE 30.83% 18.46% -5.24% 23.47%

Operating self- 111.09% 114.4% 108.54% 121%

sufficiency
ratio
Social Impact

% borrowers 60% 57% 69% 65%

below
poverty line
% women 98% 97% 98% 94%

% landless 59% 61% 62% 53%

First time 27% 45% 32% 29%

borrowers

Sources: www.scribd.com

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Explanation:

Calculating the debt ratio, we came to see that Asmitha microfinance institution is
having the highest debt ratio, i.e. 96.39%. That this company is highly leveraged one. The
reason behind such is better understandable form the balance sheet. In 2007-08, the
company has issued long-term loan, of Rs 3,030,818,584 and this was increased by
more than 50 % from the previous year.
From the above table we can notice that the, the Operating Self Sufficiency (OSS) ratio of
the SKS Micro Finance was the highest, this shows that how well the company is
managing their loan distribution amount or repayment amount to meet the operating
expenses. By comparing this ratio with others, we can predict the future of the
organization.
Now if we notice social impact ratio‘s like % borrowers below poverty line, % of woman
etc. are very important for the economic development and the companies‘ contribution
in reducing the poverty.

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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.

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Business model of GRAMEEN bank:

ABOUT GRAMEEN BANK

The Grameen Bank is a Microfinance Organization and community development bank started
in 1976 by the Nobel Laureate, Professor Muhammad Yunus in Bangladesh that makes small
loans (known as microcredit) to the weaker sections, without requiring collateral or any deposit.
The word "Grameen", derived from the word "gram" or "village", means "of the village. In
October 1983, the Grameen Bank Project was transformed into an independent bank by
government legislation. Grameen today has some 2,468 branches in Bangladesh, with a staff of
24,703 people serving 7.34 million borrowers from 80,257 villages. Grameen‘s methods are
applied in 58 countries — including the United States. Grameen Bank borrowers own 94% of the
Bank. The remaining 6% are owned by the government.

In October 1983 Yunus formed the Grameen (―village‖) Bank, based on principles of trust and
solidarity. There is no legal instrument (no written contract) between Grameen Bank and its
borrowers, the system works based on trust. In a country in which few women may take out
loans from large commercial banks, Grameen has focused on women borrowers as 97% of its
members are women.[ Because women (far more than men) could be counted on to invest the
loans in business and repay them on schedule, they became the overwhelming participants in
Grameen Bank, where they receive 97 percent of all credit. Grameen bank follows the one
principle that ―the more you have, the more you can get. In other words, if you have little or
nothing, you get nothing.

According to a World Bank study of Grameen, 5 percent of Grameen borrowers get out of
poverty every year., according to Grameen‘s figures, nearly two-thirds [64 percent] of borrowers
who have been with Grameen for five years are now out of poverty. And Grameen‘s indicators of
poverty are much more stringent than those of the World Bank, which defines poverty as
earning less than a dollar per day. Grameen‘s definition of poverty alleviate is not only based on
financially sound of the family, but they notice the 10 indicators and all must be met before they
say that family is no longer poor.. Indicators include such things as housing quality, adequate
nutrition, and access to safe water, school attendance by children, certain minimal savings, etc.

21
Working model of Grameen bank:

The manager first makes a round to the appointed area to introduce Grameen policies
and programs. When one approaches with genuine interests Bank manager asks her to
gather 4 more members to form a group. Every group has 5 members, one as its head.
Only two members can obtain loan at first. After 6 weeks of successful repayment
another two can apply for loan. The leader can only receive loan at last. 8 groups make a
Center. And a center elects its leader for one year, after one term the leader resigns and
never be elected again.

Each borrower must belong to a five-member group. These groups do not provide any
guarantee for a loan to one of their members; repayment responsibility solely rests on
the individual borrower. However if one member of a group defaults, that group will
never receive a loan from Grameen. So it‘s a kind of social pressure exerted by the group
members. Grameen enjoys very high payback rates—over 98 percent.

Grameen bank is not only a Micro financing institution but it is Micro financing plus,
which means they not only provide credit to the borrowers this type of MFI believes that
the poor need more than just money to transform their lives. Typical services to
supplement the credit include discounted health care services, preventative health care
education, literacy courses, vocational training courses, technology courses, youth
programs for children of borrowers, life/disability insurance, and savings programs.

Grameen Bank is owned by the borrowers themselves — it is owned by the poor women
who rely on the microcredit loans for income generation. It is therefore tied to local
money; each branch has to be self-sustaining. Local branches get no money from
outside — there is no borrowing from the head office. The profit all goes back to the
borrowers.

Grameen bank has 21,000 students with student loans, studying in medical schools and
elsewhere. They have also provided some 30,000 scholarships to the children of our
borrowers each year. They even give loans to beggars — poor people who go door-to-
door, who we call ―struggling members‖ — so they can stop begging and generate income
through selling such things as food, toys, or household items. They currently have
100,000 ―struggling members‖ in the program.

Loan Insurance

How loan insurance would be beneficiary for the borrowers? Borrowers always worry
what will happen to their debt if they die. Will the family members pay off their debt?
They believe that if their debt remains un repaid after their death

22
The insurance program is very simple. Once a year, on the last day of the year, the
borrower is required to put in a small amount of money in a loan insurance savings
account. It is calculated on the basis of the outstanding loan and interest of the borrower
on that day. She. If a borrower dies any time during the next year, her entire outstanding
amount is paid up by the insurance fund which is created by the interest income of the
loan insurance savings account. In addition, her family receives back the amount she
saved in the loan insurance savings account. Borrowers find it unbelievably generous.

If the outstanding amount remains the same on two successive year-ends, the borrower
does not have to put in any extra money in the loan insurance savings account in the
second year. Only if the balance is more she has to put in money for the extra amount.
Even if the outstanding amount happens to be several times more at the time of her
death than what it was on the preceding year-end, under the rules of this program, the
entire amount will still be paid off from the insurance fund.

All the borrowers of Grameen bank have to pledge the ―16 Decisions‖. Of course, many of
the women cannot read or write, so they have to listen to others recite the 16 Decisions,
and then have to memorize them. This has become an extremely important part of our
microcredit program. The ―16 Decisions‖ are mentioned under:

23
 16 Decisions

1. We shall follow and advance the four principles of Grameen Bank:

Discipline, Unity, Courage and Hard work – in all walks of our lives.
2. Prosperity we shall bring to our families.
3. We shall not live in dilapidated houses. We shall repair our houses
and work towards constructing new houses at the earliest.
4. We shall grow vegetables all the year round. We shall eat plenty of
them and sell the surplus.
5. During the plantation seasons, we shall plant as many seedlings as
possible.
6. We shall plan to keep our families small. We shall minimize our
expenditures. We shall look after our health.
7. We shall educate our children and ensure that they can earn to pay
for their education.
8. We shall always keep our children and the environment clean.
9. We shall build and use pit-latrines.
10. We shall drink water from tube wells. If it is not available, we shall
boil water or use alum.
11. We shall not take any dowry at our sons' weddings; neither shall we
give any dowry at our daughter's wedding. We shall keep our centre
free from the curse of dowry. We shall not practice child marriage.
12. We shall not inflict any injustice on anyone; neither shall we allow
anyone to do so.
13. We shall collectively undertake bigger investments for higher
incomes.
14. We shall always be ready to help each other. If anyone is in
difficulty, we shall all help him or her.
15. If we come to know of any breach of discipline in any centre, we
shall all go there and help restore discipline.
16. We shall take part in all social activities collectively

Sources: www.Grameen-info.org

24
The Repayment Mechanism

Following method is followed by Grameen for loan and repayment.

- One year loan
- Equal weekly installments
- Repayment starts one week after the loan
- Interest rate of 20%
- Repayment amounts to 2% per week for fifty weeks
- Interest payment amounts to 2 taka per week for a 1000 taka loan

Criticism of Grameen Bank:

As the Grameen model was ‗exported‘ overseas during the 1990‘s, the Bank continued to
grow in Bangladesh. Client numbers grew steadily, but the portfolio grew more quickly
as clients took bigger loans and new types of loans (especially housing). Those of working
in Bangladesh increasingly heard that repayment rates were falling, but that branch
managers were massaging their performance figures by issuing new loans to defaulters.
These were immediately used to pay off the outstanding loan and hide the problem of
non-repayment.

There were also criticisms of the gender achievements of the Bank: did it merely get
women to take loans that they gave straight to their husbands?

Then, there were criticisms of the idea by Yunus that, of every Grameen Bank loan being
used for microenterprise, and every microenterprise being successful. Independent
fieldwork showed that Grameen Bank clients used their loans for many different
purposes – business, food consumption, health, education and even dowry.

Grameen Bank clients paid the kisti (weekly repayments) on their loans not from a single
microenterprise, but from patching together earnings from casual employment, self-
employment, remittances and a variety of loans from other sources. But, as clients stayed
with Grameen Bank, they were under pressure to take bigger, ordinary loans alongside
new housing loans. As a result, they took on levels of debt they could not service from
their income. To stop them from defaulting, they were issued with larger loans by
Grameen branch managers to repay earlier loans.

25
Self help group (shg)
“A Self-Help Group (SHG) is a registered or unregistered group of micro entrepreneurs having
homogenous social and economic background voluntarily, coming together to save small
amounts regularly, to mutually agree to contribute to a common fund and to meet their
emergency needs on mutual help basis:”

In short, SHG is a small group of rural poor, who have voluntarily come forward to form a
group for improvement of the social and economic status of the members.

Concept of SHGs:

It can be formal (registered) or informal.

The concept underlines the principle of, Credit and Self Help.
Members of SHG agree to save regularly and contribute to a common fund.
The members agree to use this common fund and such other funds (like grants and loans
from banks), which they may receive as a group, to give small loans to needy members as
per the decision of the group.
The group members use wisdom and peer pressure use of credit and timely repayment
thereof. In fact, peer pressure has been recognized as an effective substitute for
collaterals.

Need of SHG’s:

The rural poor are incapacitated due to various reasons, such as; most of them are socially
backward, illiterate, with low motivation and poor economic base. Individually, a poor is not
only weak in socio-economic term but also lacks access to the knowledge and information,
which are the most important components of today‘s development process. However, in a group,
they are empowered to overcome many of these weaknesses. Hence, there are needs for SHGs,
which in specific terms are as under:-

To mobilize the resources of the individual members for their collective economic
development.
To uplift the living conditions of the poor.
To create a habit of savings.
Utilization of local resources.
To mobilize individual skills for group‘s interest.
To create awareness about rights.
To assist the members financially at the time of need.
To identify problems, analyzing and finding solutions in the group.
To act as a media for socio-economic development of the village.
To develop linkages with institutions of NGOs.
To organize training for skill development.
To help in recovery of loans.

26
 To gain mutual understanding, develop trust and self-confidence.
To build up teamwork.
To develop leadership qualities.

Structure of SHGs:

Size of SHG

The ideal size of an SHG is 10 to 20 members. The disadvantage of having high number
is that, members cannot actively participate. Also, legally it is required that an informal
group should not be of more than 20 people.
The group need not be registered.

Condition required for membership for SHG’s

Members should be between the age group of 21-60 years.

From one family, only one person can become a member of an SHG. (More families can
join SHGs this way).
The group normally consists of either only men or only women. Because mixed group it
would hindered or obstruct free and frank discussions, or opening of the personal
problem.
Women‘s groups are generally found to perform better. (They are better in savings and
they usually ensure better end use of loans).
Members should be homogenous i.e. should have the same social and financial
background. (Advantage: This makes it easier for the members to interact freely with
each other, if members are both from rich as well as poor class, the poor may hardly get
an opportunity to express themselves).
Members should be rural poor (By poor one should be guided by the living conditions).

27
 Comparative Analysis of Microfinance Services Offered To The Poor

PARAMETER Money Commercial Govt.Sponsored Financial Program

Lenders banks Programs of MFIS’
Ease of Access High Low Low High

Lead time for loans Low Very high Very High Low-Medium

Repayment terms Very Short Extreme Long Extreme Long Short

Interest Rates Fixed and Fixed and easy Fixed and easy Flexible
Rigid
Incentives None None None Repeat and larger
loan
Repeat Borrowing Possible Possible but Possible but likely Stream credit is
likely assured
Loan Access Procedure Very quick Extreme time Extreme time Simple and quick
consuming consuming
Collateral and Demand Mandatory Required but Not required Not required social
Promissory Note hypothecation although a charge collateral is used
of asset may on the assets for physical
suffice become collateral
automatic
Sources: www.scibd.com

28
Year wise increase of SHG’s and their finance:

Year No. of SHGs Cumulative no. of

financed SHGs financed (in
during the year (in lakh)
lakh)

2001-02 1.98 4.61

2002-03 2.56 7.17
2003-04 3.62 10.79
2004-05 5.39 16.18
2005-06 6.20 22.38
2006-07 6.87 29.25
2007-08 7.94 37.67

Sources: www.inblogs.com

Initially there was a slow progress in the programme up to 1999 as only 32,995 groups were
credit linked during the period 1992 to 1999. Since then the programme has been growing
rapidly and the number of SHGs financed increased from 81,780 in 1999-2000 to more than
6.20 lakh in 2005-06, 6.87 lakh in 2006-07 and 7.94 lakh in 2007-2008.

29
 Growth of linked SHG's in 13 Priority States

State 2003 2004 2005 2006 2007 2008

Assam 3,477 10,706 31,234 56,449 81,454 92,343

Bihar 8,161 16,246 28,015 46,221 72,339 83,776

Chhattisgarh 6,763 9,796 18,569 31,291 41703 49,887

Gujarat 13,875 15,974 24,712 34,160 43,572 51,340

Himachal 8,875 13,228 17,798 22,920 27,799 34,087

Pradesh
Jharkhand 7,765 12,647 21,531 30,819 37,317 41,889

Maharashtra 28,065 38,535 71,146 1,31,470 2,25,856 2,49,541

Madhya Pradesh 15,271 27,095 45,105 57,125 70,912 80,136

Orissa 42,272 77,588 1,23,256 1,80,896 2,34,451 2,60,656

Rajasthan 22,742 33,846 60,006 98,171 1,37,837 1,58,690

Uttar Pradesh 53,696 79,210 1,19,648 1,61,911 1,98,587 2,14,578

Uttaranchal 5,853 10,908 14,043 17,588 21,527 23,089

West Bengal 32,647 51,685 92,698 1,36,251 1,81,563 210,689

Total 2,49,462 3,97,464 6,67,761 1,005,272 1,374,917 1,550,701

Percent 59 68 51 37 13
increase
Sources: research paper by Prabhu Ghate

Explanation:

From the above figure we can notice the growth of SHG‘s in top 13 states. From 07 to 08 no of
SHG‘s i.e. one group of SHG consists 10 to 15 members. We can noticed that the highest
percentage increased during the year between 04 -05.Over 90 percent of them women, and the
total number of SHG members who have ever benefited from the programme to about 51
million. Since some households have more than one member in the programme, the number of
families benefited is slightly smaller than these numbers imply. About half of them are below the
poverty line.

30
Joint liability group (jlg)
“Joint Liability Group (JLG) is a group of individuals coming together to borrow from the
financial institution. They share responsibility and stand as guarantee for each other.”

The individual wanting loans will have to form into a group where each member will be
providing cross guarantee for each other.

Difference between SHGs and JLGs

SHGs (Self Help Groups) JLGs (Joint Liability Groups)

• Minimum 10 members • Minimum 3 members and

and maximum 20. maximum 5.

• For SHGs meeting is • There is no necessary of

compulsory. compulsory meeting for
JLGs.

• For SHGs the bank loan

is available. • For JLGs, they get the loan
only from MFIs.
• SHG gets the benefit of
the entire government • There is no benefit of any
scheme, which is viable government schemes for
for them. JLGs.

31
How JLGs formed

The JLG has to be formed by the FCO-JLG: Field Credit Officer-Joint Liability Group. After the
formation, FCO has to carry out at least three meetings with the group member in order to
explain about SAKHI, its product, process and procedure. After the meetings the group should
have clear understanding of the following:

 SAKHI branch office and Head Office address and contact numbers.
 Name of the JLG-FCO and the Branch Manager of the concerned branch.
 Clear understanding of Group Liability and role of the Leader.
 Product details such as repayment term, daily repayment methodology, membership fee
and interest rate.

After the JLG FCO has completed the process of group formation he/she has to invite his/her
Branch Manager who has to verify the group. Loan process for any particular group can start
only after the group verification has been done and group has been approved by the Branch
Manager. In case the group is not approved by the Brach Manager further meetings have to be
held by the Field Credit Officer with the JLG verification has to be redone. Brach Manager has to
verify these documents.

JLG features:

JLG haves 3-5 members group.

The group should be either all male or female only in exception cases can there be a
mixed group.
Members within a group should have similar turnover/profit and group should be
economically homogeneous.
The group member should be well known to each other.
The group member should have their own business.
The groups have shop/ business in the same locality.
Lending may start from group size of not less than three members.

32
NABARD Initiative in Micro Finance Introduction
National Bank for Agriculture and Rural Development (NABARD) was established as
an apex rural development bank in the year 1982, through an Act of Parliament, to provide
refinance for agriculture, allied activities, small scale industries, cottage and village industries,
rural artisans and crafts in an integrated manner. Earlier, RBI and GOI managed the loans and
credits for the poor but, these bodies wanted some other body which fully managed this
activities i.e. distribution of loans and credits to the poor people. It was set up with an initial
capital of Rs 100 crore, which was enhanced to Rs 2,000 crore, fully subscribed by the
Government of India and the RBI.

The bank's vision is "to facilitate sustained access to financial services for the unreached poor in
rural areas through various microfinance innovations in a cost effective and sustainable
manner."

Role of NABARD

Providing refinance to lending institutions in rural areas.

Bringing about or promoting institutional development.
Evaluating, monitoring and inspecting the client banks.

Besides this pivotal role, NABARD also:

NABARD is an apex institution accredited with all matters concerning policy, planning
and operations in the field of credit for agriculture and other economic activities in rural
areas.
It is an apex Refinancing agency for the institutions providing investment and
production credit for promoting the various developmental activities in rural areas
It prepares, on annual basis, rural credit plans for all districts in the country; these plans
form the base for annual credit plans of all rural financial institutions.
It undertakes monitoring and evaluation of projects refinanced by it.
It promotes research in the fields of rural banking, agriculture and rural development.

33
Organizational structure

Sources: www.nabard.org

From the above chart we can see the organizational structure of NABARD. In that there are Board
of Directors and the Current Chairperson (Ranjana Kumar) and four Executive Directors (V S Das,
Prakash Office Bakshi, S K Mitra and). There are 24 Head Office Dept., 8 Training Establishment
and 28 Regional Offices and Regional Offices there are Sub Office and 391 District Offices

NABARD’s offices all over India

Sources: www.managementparadise.com

34
Financial Santa Clause (NABARD)

National Bank for Agriculture and Rural Development (NABARD) was established as
an apex rural development bank in the year 1982, with the initial capital of Rs 14000 crore,
which was provided by the Government of India (GOI) and Reserve bank of India (RBI). And till
March 30, 09 it reached to Rs 1, 00,000 crores with the surplus of Rs 1400 crores.

NABARD gets fund from the GOI, RBI, Swiss Bank, big NGO‘s etc. NABARD‘s financial position
is very robust. Its Reserve and Surplus increased by 10.26% from 07 to 08, and its Cash and
Bank balance and Investment increased by 40.16% and 15.5%. So this shows that how well
NABARD is managing their funds and how year and year it blossomed.

How NABARD helps Banks and MFI’s in augmenting?

Earlier Banks and MFI‘s both were having different approached to work. If one was moving in
right direction then other was in left. So NABARD played a very crucial role to bring them both
in the way. Big commercial banks were focused on only large and medium class people where
the poor were neglected because of less savings and borrowing capacity. And the on the other
hand MFI‘s were focusing on poor women.

As there are more Banks then the MFI‘s, so the large chunk of population gets neglected. So the
NABARD came into the picture and try to bridge the gap between the two. What are the
techniques that NABARD use for the Banks and MFI‘s:-

For banks:

Provide Refinance to the banks.

Conduct the workshop where the executive of the NABARD meet the executive and
employees of different banks and help them to understand the need and importance of
microcredit to the poor people.
NABARD helps the banks to interface or try to convene the NGO‘s and other institutions
with the banks which earlier they were avoiding to meet.
NABARD‘s is having rule for the banks that they have to keep aside a certain amount of
loan for the people of Below Poverty Line.

For MFI’s:

NABARD gives loans to the MFI‘s after analyzing there rating and balance sheet.
Conduct the workshop where the executive of the NABARD meet the executive and
employees of different Banks and MFI‘s and bring them together on the same podium.
NABARD gives the refinance to the MFI‘s also.

35
How NABARD manage their Repayment ratio?

It‘s very interesting o know the repayment structure of the NABARD. NABARD provides the
loan to the MFI‘s, Banks, Agriculture loan, other microcredit loan etc. at a very nominal rate of
interest and without any deposit of collateral.

But their Repayment ratio is more than 95%, let‘s see what are the reasons and how it manage
such a high repayment ratio:

Before providing loan to the institutions NABARD see the credit rating of that institute
given by the rating agency. If they find that sufficient they grant according to that.
NABARD analyze the balance sheet and profit and loss statement of the borrowing
institutes.
They (NABARD) sees the past record of the borrowing institutes i.e. there repayment
ratio, there schemes, there management and the executives who are working in that
institutes.

How NABARD gives loan to the Institutions?

While I was doing survey what I found out that, NABARD follows the very strange way of
providing the loans. They give loans to the every ODD number people or institutes i.e.3, 5, 7, 9….

Because there are so many borrowers every day that its difficult to provide to each and every
one. So in this way they try to eliminate the overcrowding problem.

36
Business Model of SAKHI
Introduction

SAKHI (An Organization for Women) is a woman friendly non-government development

organization established in the year 2002 by a group of professional to address the issue of
poverty- stricken people. Since its inception SAKHI has endeavored to deal with critical issues
like illiteracy, health, poverty, assets less status of the poor women and to achieve the goal of
gender mainstreaming and thus linking it to the broader aim of sustainable development.

In 2006 SAKHI realized the importance of economic empowerment which can have a cascading
effect on the overall development and women in particular. With this realization SAKHI shifted
its focus from other activity towards economic empowerment of woman and took up Micro
Finance as its major area of activity.

MISSION

―To provide financial services to the economically weak and disadvantaged groups for their
livelihood enhancement.‖

VISION

―To emerge as a successful NBFC with an annual disbursement of Rs 40 crore and a

client base of 40,000 by 2012.‖

OBJECTIVE

1. Women Empowerment:

SAKHI Believes that ―Women participation is the most effective instrument in bringing
about change in their way of life both economic well-being and adaption of new practices
in changing the socio-economic environment:. In order to bring about women
participation and their decision making and negotiating power about their rights in all
walks in life.

2. Women Health:

Health leads to prosperity. Low endowments, production possibilities, and exchange

option for women from disadvantage section in rural marginalized the women; this
marginalization often results in neglecting the health issues of women and children.

37
 3. Women Economic Development:

Our objective is to strengthen women‘s economic capacity as entrepreneurs/producers,

off farm economy and traditional activities. SAKHI is committed to address factors
leading to feminization of poverty and gender inequality.

4. Women and natural resources:

Our observation is that women are most effective by degradation of natural resources.
We are promoting environment awareness and natural resources conservation activities
through women‘s participation at village level.

Organization Structure

SAKHI had developed a systematic organizational structure for itself. The organogram below
reflects the organization‘s structure. The aim to have clear staff structure with clearly defined
role and responsibilities.

Board of Trustees

CEO

HR Manager Operation Mgr Finance Mngr Audit Manager Admin Manager

Area Mngr Audit Team

Branch
Mgr

FCO‘s

38
 Brach structure

Branch Manager

A/C MIS FCO-JLG FCO FCO-GRLN FCO-GRLN

Officer

FCO-JLG: Field Credit Officer-Joint Liability Group

FCO-GR-LN: Field Credit Officer Group Loan

How SAKHI disburse the Loans?

Loan Size:

• Cycle –I Rs 3000-Rs 5000

• Cycle –II Upto Rs 8000

Upto Rs 12,000

• Cycle- IV Upto Rs 15,000

12
Duration in months

Minimum Loan size Rs 3000

Maximum Loan size Rs 15,000
Repayment Frequency Monthly
Rate of interest (P.a)
18%
Upfront loan proceeding
2%
fees
Group guarantee followed by
Security
centre guarantee

Sources:-SAKHI survey

39
Loans are to given in multiples of thousands only, it can be noted that monthly repayment
installments for each loan has kept at 10% of the loan amount for the convenience of
transaction. The balance amount is to be adjusted in the 12 th installment. Repayment
installment chart for each size loan is available with the office

How they charges interest?

Suppose they have given loan of Rs 5,000 to an individual in a group. So he gives Rs 500 per
month i.e. 425 capital and Rs 75 interest which is 1.5% of 5,000. So at the end of the year an
individual pays Rs 6,000. If we look from other angle, 18% of 5,000 comes to 900 and Rs 100
processing fees.

If we go little deep, then their monthly capital is 416.66 +8.33 (transaction fees) + 75 (1.5% of
900) = Rs 500 per month.

How SAKHI raise capital?

Sakhi raises capital from 2 institutes:

Friends of Women World Bank.(FWWB)

Indian Bank.

From these above routes SAKHI raises fund. The rate charges by the FWWB are 13.5% p.a and
Indian Bank charges 13.75% p.a. and from NABARD they get Grant.

Why SAKHI charges such a high rate of interest (18% p.a)?

The answer which I got on this question was that, SAKHI receive loan from the above institute
and that loan is not disbursed immediately. Suppose SAKHI borrowed 10 lakhs loan, but that
amount is not disbursed immediately. But the rate of interest is start charging from the first date
of borrowing by the SAKHI.

One more answer that I got was, that they (SAKHI) has to charge the same rate of interest to all
there borrowers even if the above mentioned two capital institution hikes the loan rate of
interest,

So apart from high transaction and operating cost, this two reasons also there why the rates are
higher.

40
Is government waiver plan effected there Institution?

As government waive was only for the government institutions and SAKHI is a private
institution, so there was not any big effect on the SAKHI. But as that rule was only for
government institution, Pvt. Institution also not remained isolated, they got effected by the high
rate charges from the government institution and there borrowers also requested them to waive
their loan amount.

Business plan projection

SAKHI has prepared detailed financial projection for its Micro Finance operations. The
assumptions for the Business plan as well as detailed projected financial statement are
presented below.

Parameter Fy2007 Fy2008 Fy2009 Fy2010 Fy2011

New Clients 3000 9000 11000 14000 14000
AVERAGE LOAN SIZES (RS.)

Group Loans 5000 6500 8450 10985 13182

JLG Daily Loan 10,000 11000 11,550 12,128 12,734

NUMBER OF LOANS

Group loans 1855 5033 9339 14790 201896

JLG Loans 1855 1855 14,008 22,184 30,278

INTEREST RATE ON LOANS

Group loans 17% 17% 16% 14% 14%

JLG loans 32% 32% 30% 29% 28%
Loan product 3 0% 0% 0% 0% 0%
UP-FRONT FEE ON LOAN

Group loans 2% 2% 2% 2% 2%
JLG loans 0% 0% 0% 0% 0%
Loan product 3 0% 0% 0% 0% 0%
Loan loss reserve 1% 1% 1% 1% 1%
Client per batch 928 1398 1459 1541 1802

Client per field staff 180 250 300 400 450

Rate of interest on 14% 14% 14% 14% 14%

Sources: SAKHI paper

41
 Projected balance sheet

FY 06-07 FY 07-08 FY 08-09 FY 09-10 FY10-11 FY 11-12

ASSETS

Net Cash Balance 722570 938892 2463607 5427910 13231540 15525148

Loan outstanding 2573207 19176514 42443039 90509226 166763111 256575806

Less: loan loss 191765 424430 905092 1667631 2565758

Net loan 2573207 18984749 42018608 89604134 165095480 254010048

investments 80000 1680000 6240000 15040000 31840000 55840000

Net fixed assets 168301 398301 2193451 3835789 5298095 7157123

3544078 22001942 52915666 113907833 215465114 332532319

LIABILITIES

Borrowings 3066666 20453333 48820000 96400000 188400000 293400000

Other liabilities 216998 716998 1216998 1716998 2716998 3716998

SHAREHOLDERS

Donated equity 509943 2009943 4009943 6009943 6009943 6009943

General reserve 14117 287767 1354952 3175113

Equity 10000000 15000000 20000000
Retained earnings 129750 (249529) (1178332) (1145392) (506867) 1983222

Profit (379379) (928803) 32940 638516 2490097 4247043

260413 831611 2878668 15790835 24348116 35415321

Total liability & assets 3544078 22001942 52915666 113907833 215465114 332532319

Sources: SAKHI paper

42
Business Model of Mas Finance

INTRODUCTION

MAS Finance is basically a NBFC (Non Banking Financial Company). They provide minimum
loan of 10,000 and maximum 40,000. MAS Finance is one of the blooming private MFI in the
current era. They are having a sufficient amount of capital with them for their future growth.

Role and Function

Helping in eradication of poverty.

Providing finance for the upliftment of the individuals.
Helps the borrower in establishing their business.

OBJECTIVE

1. Women Empowerment.
2. Women Economic Development.
3. Building better India.

43
 Organization Structure

Board of Directors

Managing Director

Director finance Director Legal

Vice President COO Recovery Manager

Finance Mnager
Legal Team
Treasury &
Recovery Offcr
Planning Team

Executive &
Agency

Product Product Head Product Product Product Product

Head CV Head Two Head Lap Head Head
Micro Wheeler Insurance Used
Loan Car

Sources: - MAS Finance Papers

44
How MAS FINANCE raise capital?

Their main source of income is through banks. They have relation with 10-12 banks who are
willing to fund them. The rate charges by the banks is between 12-13%.

How MAS Finance manages their repayment structure

Loans provided by the MAS FINACE are relatively bigger in size, starting from Rs.10,000. They
give loan at the maximum tenure of 36 months and collect installments on monthly basis. They
help borrowers in opening a bank accounts if they do not have and to maintain the security they
collect the post dated cheques from them for repayment.

MAS Finance has strange way of providing loan?

MAS FINANCE has a unique way of providing loan. Till now I have studied, all the MFIs provide
the loan in the groups. But MAS FINANCE provides the loan individually. They don‘t lend in
groups.

When I asked the reason, they said that it‘s their old way of providing the loan and they follow it.

Why MAS Finance charges such a high rate of interest (25-26%% p.a)?

Again the same question, why the rates are high, and same reply. Because of the high
transaction cost and not disbursement of loan immediately to the end users.

Any default case regarding to repayment of the loan?

As MAS FINANCE provides loan individual to individual, there are high changes of default in
the loan. Company has also faced few default cases in the past. Their repayment ratio is 94%,
which is less compares to other MFIs.

Even after providing individual loan, how they can manage such a high repayment ratio? The
answer is. Before providing the they asked the borrower for the post dated cheque. So if in future
if the borrowers defaults then they can settled with that post dated cheque.

45
Credit institutions as a Political tool: Debt relief in
India
Rural financial institutions that are associated with governments often become the target of
politicians. Indian Government appointed Agricultural Credit Review Committee in 1989.
During the election years, and even at other times, there is a considerable propaganda from
political platforms for postponement of loan recovery or pressure on the credit institutions to
grant extension or waive of the loans.

The ―willful‖ defaulters are, in general, socially and politically important people who example
others are likely to follow. The waiver of farm loans by the government of India has resulted in
increased defaulters.

Paying back the loan is a cultural concept. People borrowing money should feel the strong moral
urge to pay the loan back. Loan waivers instead make them feel that if the things go really, really
bad, government will step in and cancel the interest payable and even principle also. This will
increase the defaulters list because even the decent borrowers default on their loan.

In addition to know lacuna in the operating system for microfinance, the most serious against
the success of Microfinance, emerges from political intervention.

For example: around the year 1995, at the behest of Mr. Devilal the government of India waived
the repayment of agriculture loans, in which the outstanding debit amount was less than Rs
10,000 per loan account. It was noticed in the RBI inspection of some of the District Central Co-
0perative Banks (DCCBs) during the latter years that hundreds in thousands of defaulters with
outstanding Dr Balance in excess of Rs 10,000 were also accommodated by some accounting
jugglery. Be whatever it may, such declaration from the government obviously prompts the
emergence of willful defaulters

In other words the farmers, where otherwise having financial means to repay choose the easier
path of non repayment. Ultimately it is resulted into mounting NPAs in the balance sheet of the
co-operative banks and more seriously dreadful challenge to the functioning of Microfinance.

This sad experience is recently repeated when an enormous package of Rs 60,000 crore is
declared by Shri P.Chitambaram and further package of Rs 40,000 crore is also declared by Mr.
Rahul Gandhi. This proves that the politicians were in powered have no respect to create and
solitude a noble and viable financial system, such as Microfinance.

Such a culture will seriously impact the MFI‘s operating in the rural areas. The farmer, whose
agriculture loan from the state owned bank was waived, will have a wife which is the ideal
candidate for taking loan from MFI‘s. Now would be her attitude to paying the loan back, when
her husband‘s loan get waived by the Government itself? Because of this attitude many MFI‘s
reluctant to enter into this sector (Farm loan sector). As long as Government persists, privately
funded MFI‘s should never lend any money to the farmers.

46
Indeed the recent waiver packages are declared by the ruling party to enrich the balance their
Vote bank account in view of the general elections.

Loan waiving policy has any positive impact on distressed farmers who
have moneylender debt?

This loan waiver does not directly address moneylender debt, and I saw somewhere that three
quarters of the farmers committing suicides owed money to moneylenders. There are about 70%
of the poor who still takes the loan from the money lenders and the loan waiving was not for that
people who has taken loan from the moneylenders, so there would be not any relief for such
farmers, and still the suicides will continue.

“I am confused, where is my Microfinance Lost”

47
Product Design

The starting point is: how do MFIs decide what products 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 customer-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 effect 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.

48
how mfi’s 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.

What is 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:

What can go wrong?

What will we do (both to prevent the harm from occurring and in the aftermath of an
"incident")?
If something happens, how will we pay for it?

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;

49
 The Corposol/Finansol Crisis

In 1996, Finansol, a regulated financial intermediary in Columbia, suffered from

severe deterioration of its loan portfolio. While a lack of transparent and separate
accounting from its parent NGO, Corposol, added to the problem, the MFI‘s rapid
growth and poor risk management were initial culprits. In 1995, Finansol‘s
microfinance portfolio grew from $11 million to $35 million. Many of the credit
officers who delivered this growth were new and not well trained, and were
simultaneously responsible for promoting three new untested microfinance
products for Corposol. There was no mechanism to prevent clients from receiving
multiple loans from the MFI; in fact, many clients had two to three loans
outstanding. The new products were mostly unsuccessful and the management
information system had difficulty managing the diversity of products. As a
temporary measure to reduce the negative impact on the income statement
resulting from provisioning, Finansol refinanced loans on a wide scale and
extended loan terms. This further concealed Finansol‘s deteriorating asset quality.
Under pressure to generate revenue for Corposol, whose operating revenues were
heavily dependent on training fees from new clients, loan officers continued to
expand their loan portfolios by adding new clients without much regard for credit
risk. To circumvent a government policy that limited the asset growth of regulated
financial institutions to 2.2 percent per month, Corposol retained a significant
portion of Finansol‘s loan portfolio on its balance sheet, which further distorted
Finansol‘s financial statements. It wasn‘t until July 1995, when ACCION
International conducted a formal evaluation of the entire microfinance operation
that the problem came to light. A recapitalization plan called for an end to the
relationship between Corposol and Finansol and the recruitment of new investors
to raise the level of capital high enough to meet the Superintendence‘s
requirements and to fuel future growth. With the assistance of private and non-
profit sectors, the recovery plan successfully saw Finansol through its institutional
metamorphosis into what is now FINAMERICA, S.A. FINAMERICA began
operations in 1997, and as of year-end 1998, it had achieved financial solvency
with 9,800 active clients and a loan portfolio of $13.4 million. This crisis
demonstrates the need to integrate risk management in all an MFI’s
activities.

Sources: research paper Deutsche Gesellschaft für

50
Major Risks to Microfinance Institutions:

Financial Risks Operational Risks Strategic Risk

Credit Risk Transaction Risk Governance Risk

Transaction risk Human resources risk Ineffective oversight
Portfolio risk Information & technology Poor governance
Risk structure
Liquidity Risk
Market Risk Fraud (Integrity) Risk Reputation Risk
Legal & Compliance
Interest rate risk Risk External Business
Foreign exchange risk Risks
Investment portfolio 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.

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.

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.

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.

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 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.

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.

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.

How to 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.

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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:

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

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.

How to minimize fraud risk?

Introduced an education campaign to encourage clients to speak out against corrupt staff
and group leaders.
Standardized all loan policies and procedures so that the staff cannot make any decision
outside the regulations.
Established an inspection unit that performs random operational checks.

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.

53
Governance risk:

Governance risk is the risk of having an inadequate structure or body to make effective
decisions. The Corposol/Finansol crisis, described above illustrates the dangers of poor
governance that nearly resulted in the failure of that institution.

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

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Why micro finance provides loan to the women only?
A majority of microfinance programs generally target women—often more financially
responsible at repaying than men—as clients, providing them with direct control over resources.

Why MFIs typically targeted women. These factors included:

Repayment rates are higher than men, so lending to women is a better Investment.
Women are on average poorer than men, so focusing on women can help achieve
poverty targets.
Women‘s activities contribute to a community‘s economic growth, so lending to women
is more efficient.
The members in a group are selected so as to be in the same age group and residing in
the same locality being friends but not from family. In case of problems in recovery from
even one of the members, the system of joint liability ensures recovery of the dues from
all the members within a group.
Women are better borrowers because they repay their loans more faithfully than men
repay and tend to spend money on improving the standard of living of their family.
It has been proved that women are those who are the most able to manage the money of
the household. Experience has shown that women are a good credit risk, and that
women invest their income surround the well being of their families.
Women have proven to be the best poverty fighters. Experience and studies have shown
that they use the profits from their businesses to send their children to school, improve
their families‘ living conditions and nutrition, and expand their businesses.
By providing access to financial services only through women—making women
responsible for loans, ensuring repayment through women, maintaining savings
accounts for women, providing insurance coverage through women—microfinance
programs send a strong message to households as well as to communities.

Why MFI’s being criticized for providing loans to the women only?

It was found that while women were getting the loans, a "significant portion" of those
loans are directly invested by male relatives (although women bear the liability for
repayment)
Only 37% of the cases had women retained full or significant control over the businesses
that were in their names.
Repayment tensions in other microfinance programmes as well. In India in 2008 in the
state of Andhra Pradesh, media reports linked to 70 suicide deaths to repayment issues
in Grameen type programmes. The same reports also documented techniques forcing
credit circle members to stand in the sun until recalcitrant members paid up, verbal
abuse etc.
One more reason why MFI‘s critized for giving loans to the women only because,
women‘s are weak compared to men‘s and by coerce them the MFI‘s can easily
repayment their loans.

55
Another reason might be that the women not often change their whereabouts, because
they have the many responsibilities like children etc. and they easily found at home also.

56
how the recent slowdown affects the mfi’s:

Microfinance institutions have weathered the global financial storm remarkably well, but in
2009 the credit crunch and global recession could hit the sector hard. The micro finance sector
is not fully integrated into mainstream banking and so MFIs are partially insulated from
financial markets contagion.

From the very early of beginnings, the sector has expanded into a global community of over
3000 MFIs serving 125 to 150 million customers in developing countries with 25 to 30 billion
dollars in loans. The industry has consequently attracted mainstream banks like Citigroup,
Standard Chartered, and BNP Paribas. SKS Microfinance, India's largest MFI, recently raised
about 75 million dollars from private equity sources.

The most immediate worry is that the global credit crunch will affect the cost and availability of
funding. The most vulnerable MFIs will be those that get their money from foreign banks. Credit
is now tighter, slower, and more costly.

As financial institutions are struggling with their liquidity, they have less money to lend to
microfinance institutions, which in turn means less to lend to the poor, and lending happens
then at the higher rate.

Current slowdown also increases the rate of interest on borrowed sum, this further increases the
funding loan of the MFI‘s and the poor people who takes loan from the MFI‘s, would find it
difficult to borrow and this further increases the more people Below Poverty Line (BPL)

Microfinance institutions generate capital from three main sources: debt, deposits, and equity.
And during the recession all this sources of finance gets expensive. We will see one by one.
Deposits: Many MFI‘s main source of capital is from deposits, and this is the easiest
source of capital but during the recession, local currencies in developing countries lose
value, clients will find it increasingly difficult to maintain savings levels. Deposits may
decline and non-performing loans may increase as clients require additional capital to
cover basic needs.
Debt –based MFI’s: MFIs that depend upon this source of capital at greatest risk
during the financial crisis. In today‘s economy debt financing is offered at a high rate of
interest and during slow down the demand from the investors get reduced and the MFI‘s
have the fixed obligation to pay interest. So this creates the difficulty for the MFI‘s and
for borrowers during the time of slowdown.
Equity based financing: This source of finance is not very popular in India. Because
this needs a huge capital and many MFI‘s in India are not

57
 Many microfinance banks are not disturbed by the global happenings due to, the fact that they
all have high savings- and deposit this leads to less dependence on government, bank and
external funding. But even savings-led institutions are not immune to a global economic crisis.
MFI managers now report that high prices for food and fuel, a lack of demand for
microenterprise products and decrease in the incomes of the earning members are hurting their
clients. More and more clients withdraw their savings or have trouble repaying their loans.

How the MFI’s find opportunities within the crisis:

MFIs could also find opportunities within the crisis. Microfinance‘s relatively reliable
business model could attract investors looking to spread risks and diversify their
portfolios.

The downturn could also force MFIs to grow less aggressively and focus on consumer
protection, transparency, and governance.

More commercialization by the MFI‘s can also create situation of subprime style crisis.
So the slowdown would slow down the commercialization and helpful for the local
borrowers.

One more solution to solve the money problem of MFI‘s might be, to turn MFI‘s into
bank, this can solve their liquidity problem by taking deposits and lending money.

58
mfi’s 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. Lending out a million dollars in 100,000 loans of $100
each will obviously require a lot more in staff salaries than making a single loan for the total
amount. 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.

There are three kinds of costs the MFI has to cover when it makes microloans. The first two, the
cost of the money that it lends and the cost of loan defaults, are proportional to the amount lent.
For instance, if the cost paid by the MFI for the money it lends is 10 percent, and it experiences
defaults of 1 percent of the amount lent, then these two costs will total $11 for a loan of $100,
and $55 for a loan of $500. An interest rate of 11percent of the loan amount thus covers both
these costs for either loan.

The third type of cost, transaction costs, is not proportional to the amount lent. Suppose that the
transaction cost is $25 per loan and that the loans are for one year. To break even on the $500
loan, the MFI would need to collect interest of $50 + 5 + $25 = $80, which represents an annual
interest rate of 16 percent. To break even on the $100 loan, the MFI would need to collect
interest of $10 + 1 + $25 = $36, which is an interest rate of 36 percent.

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.

Why Microcredit Rates are so high?

An MFI's main objective is to provide poor and low-income households with an affordable
source of financial services. Interest charged on loans is the main source of income for these
institutions and, because they incur huge costs, the rates are correspondingly high.

Many policy makers question why microfinance interest rates remain high even when MFIs
receive concessional funds to finance lending. Donors provide concessional funds for a

59
particular usage only for a limited period, as do some governments. However, concessional
funds cannot be considered a permanent source of funds for MFIs, and provision must be made
through interest rates to sustain the lenders' operations.

The problem is that the administrative costs are inevitably higher for tiny microlending than for
normal bank lending. Lending out a million dollars in 100,000 loans of $100 each will obviously
require a lot more in staff salaries than making a single loan for the total amount. As a result,
interest rates in sustainable microfinance institutions (MFIs) are substantially higher than the
rates charged on normal bank loans.

Inflation adds to the cost of microfinance funds by eroding micro lenders' equity. Thus, higher
inflation rates contribute to higher nominal microcredit interest rates through their effect on the
real value of equity.

Most of the Micro lenders face two kinds of operating costs: personnel and administrative.
Because micro lending is still a labor-intensive operation, personnel costs are high.
Administrative costs consist mainly of rent, utility charges, transport, office supplies, and
depreciation of fixed assets.
Making and recovering small loans is costly on a per unit basis. Often loan recovery is executed
by staffs who visit clients, increasing costs in time taken and transportation used. Poor physical
infrastructure—inadequate road networks, transportation, and telecommunication systems— in
many countries in which micro lenders operate also increases administrative costs and adds
significantly to the cost of microfinance operations.

In many countries in the region, the majority of microcredit is provided by a few leading
institutions, and competition among them is mostly on non-price terms. Large-scale commercial
banks with access to low-cost funds, low operating costs, extensive branch networks, and vast
human and other resources to provide financial services efficiently are presently not
significantly involved in microcredit. The lack of participation of such conventional financial
institutions in the microcredit market also limits potential competition.

This does not mean that all high interest charges by MFIs are justifiable. Sometimes MFIs are
not aggressive enough in containing transaction costs. The result is that they pass on
unnecessarily high transaction costs to their borrowers. Sustainability should be pursued by
cutting costs as much as possible, not just by raising interest rates to whatever the market will
bear.

Inappropriate Comparisons

Microcredit interest rates are often compared with those charged by both commercial banks and
excessively subsidized lending organizations. Such comparisons are inappropriate. Commercial

60
banks most often deal with large loans, and their transaction costs are lower than those of MFIs
on a per unit basis. Thus, commercial banks are able to charge lower interest rates than MFIs.

A financial institution receiving large subsidies may charge lower interest rates than other
MFIs. In Bangladesh, the Grameen Bank charges an annual interest rate of 20% (on a reducing-
balance basis) on its main credit product.

Because this rate was below cost recovery levels, the Grameen Bank incurred losses for many
years, and these losses were underwritten by the big subsidies it received. Thus, Grameen Bank's
interest rates should not be compared with those of an MFI that has not received similar
subsidies.

Other inappropriate comparisons of MFI interest rates include those charged by government-
owned MFIs or government-sponsored microfinance programs that are often compelled to
charge lower-than-cost-recovery interest rates based on political considerations. These
comparisons also overlook that most of these programs and institutions in general are unlikely
to survive in the long term to serve the poor. Moreover, the poor have to incur unusually high
transaction costs to access credit from these sources due to credit rationing systems and rent-
seeking practices adopted by their employees.

Rate Ceilings: Not the Answer

Lower microcredit interest rates will help increase of availability of affordable finance for poor
households."Policymaker concern over high interest rates has led many to suggest capping
interest rate by setting rate ceilings. Yet that this is not an appropriate solution, explaining
"Rate ceilings will diminishing the growth of the MFI industry and result in reducing the supply
of microcredit and other financial services, harming rather than helping poor and low income
households." If rates are set to a level less than that required to cover costs, lenders will incur
losses. Not only will this hurt MFIs‘ ability to expand operations, but it will also reduce their
creditworthiness and ability to borrow.

If a rate ceiling is imposed on a state-owned institution, government will have to provide funds
to cover the resulting losses. If the lenders mobilize deposit, microcredit interest rate
ceilings may decrease the saving with MFI‘s, because ceilings depress the profitability and
viability of MFIs, savers may be reluctant to place deposits in them. This further increases the
funding problem while curtailing a valuable service in demand from poor and needy clients.

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 General Impact of Ceilings on Microcredit Interest Rates

The Supply Side The Demand

The Demand Side Side

Short-Term Short-Term
Short-Term

• Lenders compelled to reduce their • Demand for loans increases at the

Lending Rates. ceiling rate.

• Excess demand creates incentives for • Some new potential clients seek loans
Rent-seeking among lending staff. at the new rates.

• lending to the poor Reduced. • An excess demand for loans created at

the ceiling rate.
• Lenders' profits on loans to the poor
Reduced. • Price of credit to some of those who
actually get loans reduced.
• Incentives make by the MFI‘s on loans
to the poor Reduced. • Some borrowers pay higher
transaction costs than before.
• Incentives to increase investments to
expand loans to the poor reduced.

• Policy risk on lending to the poor

increased (threat of new ceilings).

•A negative signal sent to potential

Investors.

• Risk of lending to micro lenders

Increased.

• Incentives to commercial banks to

enter the microcredit market reduced.

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 The Supply Side The Demand Side

Medium- to Long-Term Medium- to Long-Term

• Microlenders' creditworthiness declines; • Some borrowers shift to informal

Price at which microlenders can commercial markets.
borrow in the market increases.
• Many former borrowers become
• Microlenders' profit declines. worse off by the decline in supply.

• Supply of funds from some donors • Defaults increase.

Declines.

• Some lenders leave the market.

• Supply of loans to the poor decline.

• Interest rates paid on deposits reduced

by affected micro lenders.

• Micro lenders increase transaction costs

of small deposits.

• Supply of micro lenders' other financial

services to the poor also declines. Short-Term

Sources: research paper by East Asia Department

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SWOT Analysis of micro finance
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. 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)

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 • 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 unserved 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.

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Sks Case study
Development of Organization

Swayam Krishi Sangam (SKS) employs the Grameen bank lending methodology. SKS is a young
MFI, which recently transformed into an NBFC and was established as an NGO in 1997 by
Vikram Akula, a social entrepreneur and graduate of both Yale & Tufts Universities.72 The
mission of SKS is, ―To empower the poorest of the poor to become economically self-reliant by
providing financial services to poor women, through groups at the village
level, in a self sufficient manner.‖

Its goal going forward is to raise money in order to scale up and reach 15 million customers by
2012. Since its founding, SKS has delivered over US $ 1.3 Billion (6,640 Crore) and has
maintained loans outstanding of US$ 451 Million (Rs 2,284 Crore) in loans to 3,953,324 women
members in poor regions of India. Thus we are interested in how it has fared as an NGO and
what has driven it to transform. It then completes the picture of the various approaches to
becoming an NBFC that an MFI can take and therefore, allows us to see a wider and richer array
of benefits and costs.

Sources of Capital

SKS transformed from and NGO into an NBFC in January 2005 order to improve financial
sustainability and access commercial funds in order to scale up outreach to 1,000,000 clients by
2010. SKS cited the benefits that it now enjoys as an NBFC as:

• Greater access to funds as commercial lenders have greater comfort lending to a

regulated company with transparent ownership.
• A diverse funding source because as an NBFC, SKS can raise equity and offer financial
returns, enabling it to access commercial investors and international capital markets.
• Greater Outreach Potential due to increased access to funds.

SKS has historically sourced most of its capital from donors and loans. In 2008, SKS indicated
that 40% of the company is owned by its clients with 15% of it owned by employees and the rest
by a group of institutional and individual investors.

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 Operation and Financial function

04-Mar 05-Mar 06-Mar 07-Mar 08-Mar

Total Branches 10 26 80 275 771

Total Sangams (Centers) 928 2,518 6,050 20,479 63,142

Total Clients 30,763 86,869 201,943 603,933 1,879,258

Total Loan Clients 24,800 73,635 172,970 513,108 1,629,474

Total Loans Outstanding( 117,167,760 332,561,200 920,691,434 2,756,961,650 10,506,707,499

Rs)

Average Loan Outstanding 4,725 4,516 5,323 5,373 6,448

per Loan Client

Total Savings 1,384,598 0 N/A N/A N/A

Average Savings per Client 174,884,069 N/A N/A N/A

Total Assets 102.30% 290,344,862 1,000,281,244 3,349,090,496 10,887,447,659

Total Networth 17.50% 3,433,420 143,815,712 716,750,911 2,125,358,001

Operating Self-Sufficiency 223 103% 110% 111% 121%

(OSS)

Administrative Efficiency 17.50% 12.34% 13.40% 11.98% 12.80%

Clients per Field Staff 223 390 435 386 436

Sources: www.sksindia.com

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Organization & Management Analysis

Strategic Vision

The strategy of SKS to achieve its mission is to help poor people access small, low interest loans
during times of crisis, so that they can avoid falling into debt traps. SKS endeavors to offer the
poor alternatives from Banks that require collateral and bureaucratic procedures as well as
moneylenders that charge exorbitant interest rates. The company does so by delivering
collateral-free microfinance in the form of small loans and savings facilities to the doorstep of
the poor. SKS seems to have a strong strategic mission but there is some uncertainty about its
ability to balance that mission while attempting to transform into a more financially sustainable
and commercially oriented institution. The rapid growth of the organization shows its
commitment to outreach and scale in the service of the mandate of microfinance. Our main
concern surrounds its ability to balance its ambitious mission to serve the ―poorest of the poor‖
in a financially viable manner.

Management & Governance

SKS has a board of directors composed of seven members about which not much was said in the
2008 annual report. Thus, the diversity and strength of SKS‘s board is somewhat unclear.
However, the members of SKS‘s Foundation, its fundraising arm, are a diverse group of
professionals and academics from India and the U.S. SKS‘s management also appears to be
quite strong based simply upon ranges of experience in business and development and
education

Transparency

The transparency of SKS seems rather good in that its financial statements arereadily available
and up to date, however not all information was outlined as clearly asthat of BASIX or in some
instances SHARE. Information detailing governance, human resource management, and
poverty impact analysis as well as poverty outreach strategy was hard to extract and not readily
available. Again, this may simply be a factor of the size of the company and its length of time in
operation.

Loan Methodology

Village selection

Before entering a village, SKS staff members conduct a comprehensive survey to evaluate the
local conditions and potential for operations. Some of the key factors include total population,
poverty level, road accessibility, political stability and safety. After a village has been selected,
SKS conducts a Projection Meeting with the entire village to introduce SKS, its mission,
methodology and services. After the projection meeting, SKS holds a Mini-Projection Meeting to

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further explain SKS to interested parties and appeal directly to those who may not have attended
the meeting because of religious, class, caste or gender barriers. Upon completion of the mini-
projection meeting, Sangam (Center) Formation begins.

Sangam (centre) formation

Before entering a village, SKS staff members conduct a comprehensive survey to evaluate the
local conditions and potential for operations. Some of the key factors include total population,
poverty level, road accessibility, political stability and safety. After a village has been selected,
SKS conducts a Projection Meeting with the entire village to introduce SKS, its mission,
methodology and services. After the projection meeting, SKS holds a Mini-Projection Meeting to
further explain SKS to interested parties and appeal directly to those who may not have attended
the meeting because of religious, class, caste or gender barriers. Upon completion of the mini-
projection meeting, Sangam (Center) Formation begins.

As additional groups are formed within a single village, a Sangam (Center) emerges. During
Sangam Formation, groups are combined to form a center of 4 to 12 groups or 20 to 60 clients.
The Sangam is responsible for the repayment of all groups, creating a dual joint liability system.
If one group defaults the rest of the Sangam must repay. Once a Sangam is formed As additional
groups are formed within a single village, a Sangam (Center) emerges. During Sangam
Formation, groups are combined to form a center of 4 to 12 groups or 20 to 60 clients. The
Sangam is responsible for the repayment of all groups, creating a dual joint liability system. If
one group defaults the rest of the Sangam must repay. Once a Sangam is formed

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Interview of end users
During my personal visit to MFIs I asked view questions from the end users (customers) of
Microfinance institute. I have taken interview of 25 people and I asked few questions to them.
Which are mentioned under:-

Q.1 Are you regular or new customer?

Q.2 If you are a Regular customer, then can you please tell me your experience?

Q.3 What‘s your opinion on interest rates?

Q.4 What you do with that loan amount?

Q.5 Does the Microfinance Institutions provide you any type of other benefits other than just
loan?

Q.6 According to you which is better, loan from local Zamidars or with MFIs?

Q.7 Have you ever faced any violation on you, if you could not able to repay the loan amount?

The common replies are mentioned under:

Ans.1 Many of the customers are regular and take loan frequently.

Ans. 2 This was the best part and I enjoyed and felt good after hearing their answers. I was
amazed that, how can a mere amount of loan can change the life of the people. I got many
answers on experiences but the best experience I want to share in this report.

There was a woman; her name was Chandrika Ben Jadwa. I asked her to share her experience
before and after the loan taken from MFIs. She was widow, with 2 daughters. After her
husband‘s death she had taken mere Rs 3000 loan from the MFI and purchased Sewing
machine, at that time her daughter was 13 years old. And now her daughters‘ age is 23.

She came with her daughter, her name was Jaya and when I asked Jaya that what she is doing. I
was perplexed by her reply. She replied me in English, and told that she worked in Baroda at call
centre. She was so confident, that I couldn‘t believe that time. Her mother told that she educated
Jaya till 11th at Village schools and after that she sent her at Baroda for further studies and due to
Micro loans, she could able to pay her tuition fees.

From that point I realized that what is the power of Micro loans and how it can change the life of
the individuals. Other experience like increase the living standard of the poor, improve in health
condition etc.

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Ans. 3 When I asked them about the interest rate. Then I got the mixed answer. Some said that
rates are high and some said that it is nominal. But one common answer that I found out that
the repayment terms is fair and one can easily understand. Most of the MFIs charges weekly
interest rate, so they said that it is easy to repay them on weekly basis.

Ans.4 Most of the Micro credit borrower uses there loan amount:

Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding,

widowhood, old age.
Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or
death.
Investment Opportunities: expanding a business, buying land or equipment, improving
housing, securing a job (which often requires paying a large bribe), etc.

When I got this type of reply I thought that the villagers and poor people can also manage the
funds as compared to an urban people.

Ans.5 Interviewer answered, that apart from loan amount MFIs helped them many ways like:
health facility, student education, teach them, help them in their business, take care of their
cattle health, sanitation etc.

Ans.6 When I asked this question, 22 people were voted for MFIs and remaining 3 for local
Zamidars. I further asked to that 3 person that why they opted for Zamidars. They replied that
there terms and conditions are much flexible compared to MFIs i.e. they can give interest on any
date. That is after 1 month, 2 month like that, there is not any uniformity in repayment.

Other answer that I got from them that because of the good relation with the Zamidars they
preferred to borrow from them. And the Zamidars charges low rate of interest compared to
MFIs. But many borrowers opted for MFIs because of less rigorous repayment terms and
method. Many additional benefits are given like education, health advice etc. to the borrowers
apart from loan amount.

Ans. 7 There are some cases of violation on the borrowers for not repayment of the interest and
loan amount. One incident discussed with me by the villagers that, there was woman, her name
was Sukhi Devi . She took loan of Rs.10,000 from one of the MFI on a condition of repay 20%
annually, but she defaulted and was not able to repay.

Actually that loan amount was taken by her husband, and he died. So she was not able to repay.
And the MFI adopted forceful way to regain their loan amount, and they forced her so much that
after sometime she committed suicide.

So according to them (end users) there was only one case where MFI used this forceful way to
regain their amount.

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Future of Micro Finance

Microfinance expansion over the next decade can be expected to be an extension of what has
been achieved so far while overcoming the hurdles that have been posing difficulty in effective
microfinance operation and its expansion.

There may be several participants in this process and their participation may be seen in the
following forms.

Existing microfinance institutions can expand their operations to areas where there are
no microfinance programs.
More NGOs can incorporate microfinance as one of their programs.
In places where there are less micro finance institutions, the government channels at the
grassroots level may be used to serve the poor with microfinance.
Postal savings banks may participate more not only in mobilizing deposits but also in
providing loans to the poor and on lending funds to the MFIs.
More commercial banks may participate both in microfinance wholesale and retailing.
They many have separate staff and windows to serve the poor without collateral.
International NGOs and agencies may develop or may help develop microfinance
programs in areas or countries where micro financing is not a very familiar concept in
reducing poverty.

Considering that the majority of the 360 million poor households (urban and rural) lack access
to formal financial services, the numbers of customers to be reached, and the variety and
quantum of services to be provided are really large. It is estimated that 90 million farm
holdings, 30 million non-agricultural enterprises and 50 million landless households in India
collectively need approx US$30 billion credit annually. This is about 5% of India's GDP and does
not seem an unreasonable estimate.

However, 80% of the financial sector is still controlled by public sector institutions.
Competition, consolidation and convergence are all being discussed to improve efficiency and
outreach but significant opposition remains.

Many private and foreign banks have unveiled their plans to enter the Indian microfinance
sector because of its very low NPAs and high repayment rate of more than 95% in spite of
offering loans without any collateral security.

Microfinance is not yet at the centre stage of the Indian financial sector. The knowledge, capital
and technology to address these challenges however now exist in India, although they are not yet
fully aligned. With a more enabling environment and surge in economic growth, the next few
years promise to be exciting for the delivery of financial services to poor people in India

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Development of Small-Scale Enterprises through microfinance will not only increase the
outreach but will also help the generation of more employment and income for the poor. It is
expected that in the following years there will be considerable deepening of microfinance in this
direction along with simultaneous drives to reach and serve the poorest of the poor.

But the crux of the discussion is that, if the over excess involvement of the government would be
there in the Micro Finance sector, than the growth of the Micro Finance won‘t much possible.
The Govt. involvement should limited to the important decisions only, but not to interfere in
each and every matter of the management.

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Recommendations and suggestions
Under mention are the few recommendations and suggestions, which I felt during my project on
Micro Finance are:-

1. The concept of Micro Finance is still new in India. Not many people are aware the Micro
Finance Industry. So apart from Government programmes, we the people should stand
and create the awareness about the Micro Finance.

2. There are many people who are still below the poverty line, so there is a huge demand for
MFIs in India with proper rules and regulations.

3. There is huge demand and supply gap, in money demand by the poor and supply by the
MFIs. So there need to be an activate participation by the Pvt. Sector in this Industry.

4. One strict recommendation is that there should not over involvement of the Government
in MFIs. Because it will stymie the growth and prevent the others MFIs to enter.

5. According to me the Micro Loan should be given to the women only. Because by this
only, MFIs can maintain their repayment ratio high, without any collaterals.

6. Many people say that the interest rate charge by the MFIs is very high and there should
be compelled cap on it. But what I felt during my personal survey, that the high rates are
justifiable. Now by this example we will get agree.

Suppose a big commercial bank gives Rs 1 million to an individual and in the same way a
MFI gives Rs 100 to 10.000 customers. So its obvious that man power cost and
operating cost are higher for the MFIs. So according to me rates are justifiable. But with
limitations.

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Conclusion
At the end I would conclude that, Micro Finance Industry has the huge potential to grow in
future, if this industry grows then one day we‘ll all see the new face of India, both in term of high
living standard and happiness.

One solution by which we all can help the poor people, i.e. in a whole year a medium and a rich
class people spends more than Rs 10,000 on them without any good reason. Instead of that, by
keeping just mereRs, 3000 aside and donate that amount to the MFIs, then at the end of the
year the total amount in the hands of poor would be ( average 500 million people *Rs 3000)=Rs
1,500,000,000,000 . Just imagine where would be India in next 10 years.

At last I am concluding by project with a very famous saying:

“Don’t wait; the time will never be just right. Start where you
stand and work with whatever tolls you may have at your commands and the
better tolls will be found as you go a long”

William Surds

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References:
Mr. Sanjiv Rohilla Mr. Arvind Parmar

Asst. General Manager Operation Manager,

NABARD SAKHI

Anand. Umreth

Ph No. 9427109121 Ph No.9925153226

Mr. Mukesh Gandhi

Director

MAS Finance

Ahemedabad

Ph No. 9825009793

Websites:

www.ifmr.ac.in
www.google.com
www.microfinanceinsight.com
www.investopedia.com
www.books.google.com
www.seepnetwork.org
www.forbes.com
www.nationmaster.com
www.thaindian.com
www.authorstream.com
www.knowledge.allianz.com
www.familiesinbusiness.net
www.indiamicrofinance.com
www.gdrc.org
www.accion.org
Research paper by Prabhu Ghate
Research paper by Vishal Sehgal
Presentation by N. Srinivasan

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