Microfinance Institutions

1. Concept of MFI

It has been approximately 25 years since the birth of Microfinance with the Founding of the Grameen Bank in Bangladesh by Professor Mohammad Yunus. India is currently considered the largest emerging market for microfinance institutions (MFIs). Commonly described as the bank for the poor, MFIs offer three basic services: savings, credit and insurance. Microfinance approach is based on certain proven truths which are not always recognised. These are : y That the poor are bankable; successful initiatives in micro finance demonstrate that there need not be a trade off between reaching the poor and profitability - micro finance constitutes a statement that the borrowers are not weaker sections in need of charity, but can be treated as responsible people on business terms for mutual profit y That almost all poor households need to save, have the inherent capacity to save small amounts regularly and are willing to save provided they are motivated and facilitated to do so y That easy access to credit is more important than cheap subsidised credit which involves lengthy bureaucratic procedures - (some institutions in India are already lending to groups or Selh Help Groups(SHGs) at higher rates - this may prevent the groups from enjoying a sufficient margin and rapidly accumulating their own funds, but members continue to borrow at these high rates, even those who can borrow individually from banks) y 'Peer pressure' in groups helps in improving recoveries.

2. Growth of MFI Sector in India Long been discussed as an innovation to address poverty issues, microfinance1 is now being viewed as the next big investment opportunity. The MFIs have invented creative methods and technology to reach out to people. The number of loan accounts serviced by MFIs in India increased from 10 million in2007 to nearly 27 million in 2010 while loan outstanding increased from $840million to $4billion (Source: Business line April 8, 2011)

3. Existing Players When we look at the two decades of MFI presence in India, we find three distinct waves. The first wave was when the development sector discovered the methodology of reaching loans to the poor through a scalable model, which was mastered by the Grameen Bank. The second wave was when these MFIs reached scale and sought methods to morph into commercial organisations. The third wave was when mainstream institutions like L&T finance and Equitas took to microfi nance as a business. The Four biggest MFI n India are:

- Share Microfi n Limited, - Asmitha Microfi n Limited, - Spandana Spoorthy Financials Limited - SKS Microfi nance.

4. How to set-up Before setting up a microfinance institution, it is imperative to come to a decision about one basic premise: do you want your MFI to be a non-profit or a for-profit institution? Non-profit MFIs are set up as trusts or societies with the aid of grants and donations, registered under the Societies Registration Act, 1860, or the Indian Trust Acts, 1882. In fact, most such MFIs started out as NGOs. If you decide to setup a for-profit MFI, there are two models to choose from: a non-banking financial company(NBFC) or a co-operative. Unlike an NBFC, a co-operative is entitled to take on savings accounts. A co-operative brings with it ownership, your customers are also owners. Get a License from RBI If you are setting up an NBFC, the Reserve bank of India (RBI) is the only authorized body thats registered to grant you a license. For this, you will need to raise Rs. 2 crore in capital. The process usually takes three to four months. You can also buy existing licenses of defunct companies from the RBI. This should cost you onwards of Rs. 25 lakh. Check www.rbi.org.in for more information. To obtain a license for a co-operative, contact the Registrar of Companies. Decide your operational model Most MFIs use groups for the intermediary financial transactions. But there are different way in which you can work with these groups. MFIs are broadly classified into two models: Self Help Groups (SHGs) and the Grameens. You must also decide the financial and non-financial services that you will be willing to offer. To better understand your customers, conduct a market survey. Also, it is advisable to run a pilot program for around 1 year, which will help you build the cohesion and helps you better tailor your products and services to your clientele. - You may require 5-6 field workers, people who actually meet and interact with the target customers. It is advisable to choose the field workers with ethnic profile from your customer base. - You may require few people to look after the accounts, and manage the MSME (Micro, Small and Medium Enterprises). Get a bank loan MFIs fall under the priority sector identified by the Government of India. The pilot program helps to gain the banks trust and put you at an advantage as you approach the banks. As always in business, it is advisable to source your funds from two to three different banks.