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ACKNOWLEDGEMENT
A project however big or small is never an individual effort. It is a collective effort of manyindividuals whose ideas and efforts give shape to a project.
It gives me immense gratification to place on records my profound gratitude and sincere
appreciation to each and every one of those who have helped me in this endeavor.
I am ineffably indebted to Professor Partha Sarthi, my faculty guide for this Specialization
Project, for his most valuable regular guidance without which my project would not have been
completed.
Any omission in this brief acknowledgement does not mean lack of gratitude.
Date: (Signature)Place: Deepshikha Nath
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DECLARATION
This is to certify that a Specialization project on An overview of Microfinance Industry in
India is submitted by DEEPSHIKHA NATH (PGDM 2008-10) Roll no. 17018 to Siva Sivani
Institute of Management in fulfillment of the requirement for the completion of Specialization
Project after the first year ofPGDM program.
Date: (Signature)Place: Deepshikha Nath
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Table of Content
ACKNOWLEDGEMENT
DECLARATION
COLLEGE CERTIFICATE
LIST OF TABLES
CHAPTER1
INTRODUCTION
1.1 Introduction.7
1.2 Microfinance Definition...7
1.3 Clients of micro finance....8
1.4 The Need in India.9
1.5 Financial needs and financial services.101.6 Role of Microfinance11
1.7 Strategic Policy Initiatives11
1.8 Activities in Microfinance .11
1.9 Scope of study...12
1.10 Significance of study.12
1.11 Objectives of study12
1.12 Literature Review..13
CHAPTERII
INDUSTRY PROFILE2.1 Industry profile..15
2.2 Microfinance- Today.16
2.3 Top 50 Microfinance Institutions...17
2.4 Legal and Regulatory Framework ..19
CHAPTER-III
MICROFINANCE MODELS AND PRODUCT DESIGN
3.1 MICROFINANCE MODELS24
3.1.1 Microfinance Institutions (MFIs).24
3.1.2 Bank Partnership Model...24
3.1.3 Banking correspondents25
3.1.4 Service company model....25
3.1.5 Micro Credit Model..26
3.2 Product Design.27
3.2.1 Technique of product design.27
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3.2.2 MFIs managing their repayment and risk management27
3.2.3 Risk Management..28
3.2.4 Major Risks to Microfinance Institutions..28
3.2.5 Financial Risks...29
3.2.6 Operational Risk... .30
3.2.7 Strategic Risk31
CHAPTER-IV
BUSINESS MODELS
4.1 NABARD Initiative in Micro Finance..33
4.1.1 Introduction ..33
4.1.2 Role of NABARD 33
4.1.3 Organizational Structure34
4.1.4 Managing repayment ratio .36
4.1.5 Providing loan to the Institutions .364.2 Business model of Grameen Bank.37
4.2.1 Introduction37
4.2.2 Working Model..37
4.2.3 Repayment Mechanism..40
4.2.4 Criticism 40
4.3 Self Help Group .....41
4.3.1 Concepts of SHGs .41
4.3.2 Need of SHGs 41
4.3.3 Structure of SHGs ..42
4.3.4 Condition for membership.....424.3.5 Year wise growth of SHGs43
4.3.6 Growth of SHGs in 13 priority states44
4.4 Business model of SAKHI.45
4.4.1 Introduction 45
4.4.2 Objective45
4.4.3 Organizational Structure47
4.4.4 Interest rate48
4.4.5 Strategy to raise capital .48
4.4.6 Reason behind high interest rate ...48
CHAPTER- V
RECOMMENDATIONS ..50
Webliography
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CHAPTER I
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1.1 Introduction
Microfinance is defined as any activity that includes the provision of financial services such as
credit, savings, and insurance to low income individuals which fall just above the nationally
defined poverty line, and poor individuals which fall below that poverty line, with the goal of
creating social value. The creation of social value includes poverty alleviation and the broader
impact of improving livelihood opportunities through the provision of capital for micro
enterprise, and insurance and savings for risk mitigation and consumption smoothing. A large
variety of actors provide microfinance in India, using a range of microfinance delivery methods.
Since the ICICI Bank in India, various actors have endeavored to provide access to financial
services to the poor in creative ways. Governments also have piloted national programs, NGOs
have undertaken the activity of raising donor funds for on-lending, and some banks have
partnered with public organizations or made small inroads themselves in providing such services.
This has resulted in a rather broad definition of microfinance as any activity that targets poor and
low-income individuals for the provision of financial services. The range of activities undertakenin microfinance include group lending, individual lending, the provision of savings and
insurance, capacity building, and agricultural business development services. Whatever the form
of activity however, the overarching goal that unifies all actors in the provision of microfinance
is the creation of social value.
1.2 Microfinance Definition
According to International Labor Organization (ILO), Microfinance is an economicdevelopment approach that involves providing financial services through institutions to low
income clients.
In India, Microfinance has been defined by The National Microfinance Taskforce, 1999 as
provision of thrift, credit and other financial services and products of very small amounts to the
poor in rural, semi-urban or urban areas for enabling them to raise their income levels and
improve living standards.
"The poor stay poor, not because they are lazy but because they have no access to capital."
The dictionary meaning of finance is management of money. The management of money
denotes acquiring & using money. Micro Finance is buzzing word, used when financing for
micro entrepreneurs. Concept of micro finance is emerged in need of meeting special goal to
empower under-privileged class of society, women, and poor, downtrodden by natural reasons or
men made; caste, creed, religion or otherwise. The principles of Micro Finance are founded on
the philosophy of cooperation and its central values of equality, equity and mutual self-help. At
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the heart of these principles are the concept of human development and the brotherhood of man
expressed through people working together to achieve a better life for themselves and their
children.
Traditionally micro finance was focused on providing a very standardized credit product. The
poor, just like anyone else, (in fact need like thirst) need a diverse range of financial instruments
to be able to build assets, stabilize consumption and protect themselves against risks. Thus, we
see a broadening of the concept of micro finance--- our current challenge is to find efficient and
reliable ways of providing a richer menu of micro finance products. Micro Finance is not merely
extending credit, but extending credit to those who require most for their and familys survival. It
cannot be measured in term of quantity, but due weightage to quality measurement. How credit
availed is used to survive and grow with limited means.
1.3 Clients of micro finance:
The typical micro finance clients are low-income persons that do not have access to formal
financial institutions. Micro finance clients are typically self-employed, often household-based
entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in small
income-generating activities such as food processing and petty trade. In urban areas, micro
finance activities are more diverse and include shopkeepers, service providers, artisans, street
vendors, etc. Micro finance clients are poor and vulnerable non-poor who have a relatively
unstable source of income.
Access to conventional formal financial institutions, for many reasons, is inversely related toincome: the poorer you are, the less likely that you have access. On the other hand, the chances
are that, the poorer you are, the more expensive or onerous informal financial arrangements.
As we broaden the notion of the types of services micro finance encompasses, the potential
market of micro finance clients also expands. It depends on local conditions and political
climate, activeness of cooperatives, SHG & NGOs and support mechanism. For instance, micro
credit might have a far more limited market scope than say a more diversified range of financial
services, which includes various types of savings products, payment and remittance services, and
various insurance products. For example, many very poor farmers may not really wish to borrow,
but rather, would like a safer place to save the proceeds from their harvest as these are consumed
over several months by the requirements of daily living. Central government in India has
established a strong & extensive link between NABARD (National Bank for Agriculture & Rural
Development), State Cooperative Bank, District Cooperative Banks, Primary Agriculture &
Marketing Societies at national, state, district and village level.
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1.4 The Need in India
India is said to be the home of one third of the worlds poor; official estimates range from
26 to 50 percent of the more than one billion population.
About 87 percent of the poorest households do not have access to credit.
The demand for microcredit has been estimated at up to $30 billion; the supply is less
than $2.2 billion combined by all involved in the sector.
Due to the sheer size of the population living in poverty, India is strategically significant in the
global efforts to alleviate poverty and to achieve the Millennium Development Goal of halving
the worlds poverty by 2015. Microfinance has been present in India in one form or another since
the 1970s and is now widely accepted as an effective poverty alleviation strategy. Over the last
five years, the microfinance industry has achieved significant growth in part due to the
participation of commercial banks. Despite this growth, the poverty situation in India continues
to be challenging.
Some principles that summarize a century and a half of development practice were encapsulated
in 2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by the Group of Eight
leaders at the G8 Summit on June 10, 2004:
Poor people need not just loans but also savings, insurance and money transfer
services.
Microfinance must be useful to poor households: helping them raise income, build up
assets and/or cushion themselves against external shocks.
Microfinance can pay for itself.
Subsidies from donors and government are scarceand uncertain, and so to reach large numbers of poor people, microfinance must pay
for itself.
Microfinance means building permanent local institutions.
Microfinance also means integrating the financial needs of poor people into a
countrys mainstream financial system.
The job of government is to enable financial services, not to provide them.
Donor funds should complement private capital, not compete with it.
The key bottleneck is the shortage of strong institutions and managers. Donors
should focus on capacity building.
Interest rate ceilings hurt poor people by preventing microfinance institutions from
covering their costs, which chokes off the supply of credit.
Microfinance institutions should measure and disclose their performance both
financially and socially.
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1.5 Financial needs and Financial services
In developing economies and particularly in the rural areas, many activities that would be
classified in the developed world as financial are not monetized: that is, money is not used to
carry them out. Almost by definition, poor people have very little money. But circumstances
often arise in their lives in which they need money or the things money can buy.
In Stuart Rutherfords recent bookThe Poor and Their Money, he cites several types of needs:
Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding,
widowhood, old age.
Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or
death.
Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of
dwellings.
Investment Opportunities: expanding a business, buying land or equipment, improving
housing, securing a job (which often requires paying a large bribe), etc.
Poor people find creative and often collaborative ways to meet these needs, primarily through
creating and exchanging different forms of non-cash value. Common substitutes for cash vary
from country to country but typically include livestock, grains, jewellery and precious metals.
As Marguerite Robinson describes in The Microfinance Revolution, the 1980s demonstrated that
microfinance could provide large-scale outreach profitably, and in the 1990s, microfinance
began to develop as an industry. In the 2000s, the microfinance industrys objective is to satisfy
the unmet demand on a much larger scale, and to play a role in reducing poverty. While much
progress has been made in developing a viable, commercial microfinance sector in the last few
decades, several issues remain that need to be addressed before the industry will be able to
satisfy massive worldwide demand.
The obstacles or challenges to building a sound commercial microfinance industry include:
Inappropriate donor subsidies Poor regulation and supervision of deposit-taking MFIs
Few MFIs that mobilize savings Limited management capacity in MFIs Institutional inefficiencies Need for more dissemination and adoption of rural, agricultural microfinance
methodologies
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1.6 Role of Microfinance:
The micro credit of microfinance progamme was first initiated in the year 1976 in Bangladesh
with promise of providing credit to the poor without collateral , alleviating poverty and
unleashing human creativity and endeavor of the poor people. Microfinance impact studies have
demonstrated that
Microfinance helps poor households meet basic needs and protects them against risks.
The use of financial services by low-income households leads to improvements in
household economic welfare and enterprise stability and growth.
By supporting womens economic participation, microfinance empowers women, thereby
promoting gender-equity and improving household well being.
The level of impact relates to the length of time clients have had access to financial
services.
1.7 Strategic Policy Initiatives
Some of the most recent strategic policy initiatives in the area of Microfinance taken by the
government and regulatory bodies in India are:
Working group on credit to the poor through SHGs, NGOs, NABARD, 1995 The National Microfinance Taskforce, 1999
Working Group on Financial Flows to the Informal Sector (set up by PMO), 2002 Microfinance Development and Equity Fund, NABARD, 2005 Working group on Financing NBFCs by Banks- RBI
1.8 Activities in Microfinance
a. Microcredit: It is a small amount of money loaned to a client by a bank or otherinstitution. Microcredit can be offered, often without collateral, to an individual or
through group lending.
b. Micro savings: These are deposit services that allow one to save small amounts ofmoney for future use. Often without minimum balance requirements, these savingsaccounts allow households to save in order to meet unexpected expenses and plan for
future expenses.
c. Micro insurance: It is a system by which people, businesses and other organizationsmake a payment to share risk. Access to insurance enables entrepreneurs to concentrate
more on developing their businesses while mitigating other risks affecting property,
health or the ability to work.
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d. Remittances: These are transfer of funds from people in one place to people in another,usually across borders to family and friends. Compared with other sources of capital that
can fluctuate depending on the political or economic climate, remittances are a relatively
steady source of funds.
1.9 Scope of the study:
The study will be confined to understand and analyze the Microfinance sector in India. It will be
focused on understanding the various segments of microfinance, regulations guiding it, the role
of Self Help Groups, NABARD and MFIs in Indian economy.
1.10 Significance of the Study:
The study will help in understanding the present Microfinance SectorThe concept of MF is over two decade old in India. In the commercial microfinance
sector in the last few decades, several issues remain that need to be addressed before the
industry which will be able to satisfy massive worldwide demand. This study will help in
highlighting few of those issues.
The study will help in understanding the role of Microfinance in current economy, the
role of women in rural India, product design, interest rate and business model of
NABARD, SHGs and MFIs.
It will help in formulating future action to deal with microcredit
The study will also help them to predict future trends in the industry.
1.11 Objectives of the study:
To understand the theoretical concept of Microfinance, its role in Indian economy and
regulations guiding its growth
To study various models of Microfinance the business model of leading MFIs,NABARD
and SHGs
To get an insight on the product designing of services by MFIs
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1.12 Literature Review:
A study was conducted by Prabhu Ghate(2006) on microfinance in India and its Progress under
the SHG Bank Linkage Programme. It was found that Of the two major models of microfinance
in India, the SHG Bank Linkage Programme (SBLP) is by far the dominant model in terms of
number of borrowers and loans outstanding. The cumulative number of SHGs linked has grown
almost tenfold in the last five years, to achieve an outreach of about 31 million families through
women's membership in about 2.2 million SHGs by March 2006. Not all SHGs are currently
"linked" in the sense of having loans outstanding to the banks or federations, and only an
estimated half of their members are poor. However, this still means about 14 million poor
households have been reached so far. Moreover the entire membership is saving regularly, and
has access to a ready source of small emergency and consumption loans in the form of loans
extended out of the group's own funds. It revealed the need to slow down and emphasize quality
rather than quantity. Global targets for the programme should be strictly eschewed, and only
indicative targets for the underserved states and regions within them, or for the share ofparticular SHPAs being encouraged, should be used for internal planning purposes. In order to
stengthen the focus on quality, and to monitor progress in increasing it, the SHG movement
needs to devise an annual or biannual sample survey, representative at the national level,
designed to assess changing (and hopefully improving) SHG quality.
Vishal Sehgal,(2008)conducted a research on the business of microfinance. Microfinance serves
as an umbrella term that describes the provision of banking services by poverty-focused financial
institutions (microfinance institutions MFIs) to poor parts of the population that are not being
served by mainstream financial services providers. The core service of microfinance is the
provision of microcredit. He observed that In contrast to commercial banks, micro-lendinginstitutions usually refrain from taking collateral. Instead they follow a model called the Self
Help Group Model or Group Lending Model. In this model an MFI lends a small loan to an
individual, who belongs to a group of 5 to 20 people. The increased demand of microfinance and
the returns that the business offers has attracted a number of players into the segment. Three
category of business has emerged. It includes government backed banks like Grameen bank,
World Bank etc. Second category includes NGOs that form SHGs and lend money to them.
Third category is of commercial banks that have become increasingly involved in microfinance
mainly in four different ways. First, some banks directly grant microloans to the poor. Second,
other banks such as Citibank or ICICI provide funding to MFIs. Third, banks distribute microfi-
nance investment vehicles, e.g. Credit Suisse offers the Responsibility Global Microfinance Fund
and Deutsche Bank distributes db Microfinance- Invest Nr. 1. Lastly, some banks such as ICICI,
Deutsche Bank or Citibank have also been active in the securitisation of MFIs loan portfolios.
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CHAPTER II
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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.
2.2 Microfinance Today
In the 1970s a paradigm shift started to take place. The failure of subsidized government or
donor driven institutions to meet the demand for financial services in developing countries let to
several new approaches. Some of the most prominent ones are presented below.
Bank Dagan Bali (BDB) was established in September 1970 to serve low income people in
Indonesia without any subsidies and is now well-known as the earliest bank to institute
commercial microfinance. While this is not true with regard to the achievements made inEurope during the 19th century, it still can be seen as a turning point with an ever increasing
impact on the view of politicians and development aid practitioners throughout the world. In
1973 ACCION International, a United States of America (USA) based non governmental
organization (NGO) disbursed its first loan in Brazil and in 1974 Professor Muhammad Yunus
started what later became known as the Grameen Bank by lending a total of $27 to 42 people in
Bangladesh. One year later the Self-Employed Womens Association started to provide loans of
about $1.5 to poor women in India. Although the latter examples still were subsidized projects,
they used a more business oriented approach and showed the world that poor people can be good
credit risks with repayment rates exceeding 95%, even if the interest rate charged is higher than
that of traditional banks. Another milestone was the transformation of BRI starting in 1984. Oncea loss making institution channeling government subsidized credits to inhabitants of rural
Indonesia it is now the largest MFI in the world, being profitable even during the Asian financial
crisis of 19971998.
In February 1997 more than 2,900 policymakers, microfinance practitioners and representatives
of various educational institutions and donor agencies from 137 different countries gathered in
Washington D.C. for the first Micro Credit Summit. This was the start of a nine year long
campaign to reach 100 million of the world poorest households with credit for self employment
by 2005. According to the Microcredit Summit Campaign Report 67,606,080 clients have been
reached through 2527 MFIs by the end of 2002, with 41,594,778 of them being amongst the
poorest before they took their first loan. Since the campaign started the average annual growth
rate in reaching clients has been almost 40 percent. If it has continued at that speed more than
100 million people will have access to microcredit by now and by the end of 2005 the goal of the
microcredit summit campaign would be reached. As the president of the World Bank James
Wolfensohn has pointed out, providing financial services to 100 million of the poorest
households means helping as many as 500600 million poor people.
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2.3 Top 50 Microfinance Institutions (As on 20/3/2009)
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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 opportunitiesin this segment.
The total loan that the MFIs 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.
2.4 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 wereestablished as voluntary, not-for-profit development organizations, their microfinance activities
were also established under the same legal umbrella. This act is applicable to the NGOs 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:
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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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CHAPTER III
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3.1Micro Finance Models3.1.1 Micro Finance Institutions (MFIs):
MFIs are an extremely heterogeneous group comprising NBFCs, societies, trusts and
cooperatives. They are provided financial support from external donors and apex institutionsincluding the Rashtriya Mahila Kosh (RMK), SIDBI Foundation for micro-credit and NABARD
and employ a variety of ways for credit delivery.
Since 2000, commercial banks including Regional Rural Banks have been providing funds to
MFIs for on lending to poor clients. Though initially, only a handful of NGOs were into
financial intermediation using a variety of delivery methods, their numbers have increased
considerably today. While there is no published data on private MFIs operating in the country,
the number of MFIs is estimated to be around 800.
Legal Forms of MFIs in India
Types of MFIs Estimated
Number*
Legal Acts under which Registered
1. Not for Profit MFIs
a.) NGO - MFIs
400 to 500 Societies Registration Act, 1860 or
similar Provincial Acts
Indian Trust Act, 1882
b.) Non-profit Companies 10 Section 25 of the Companies Act, 1956
2. Mutual Benefit MFIs
a.) Mutually Aided CooperativeSocieties (MACS) and similarly
set up institutions
200 to 250 Mutually Aided Cooperative Societies
Act enacted by State Government
3. For Profit MFIs
a.) Non-Banking Financial
Companies (NBFCs)
6 Indian Companies Act, 1956
Reserve Bank of India Act, 1934
Total 700800
Source: NABARD website
3.1.2 Bank Partnership ModelThis model is an innovative way of financing MFIs. The bank is the lender and the MFI acts as
an agent for handling items of work relating to credit monitoring, supervision and recovery. In
other words, the MFI acts as an agent and takes care of all relationships with the client, from first
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contact to final repayment. The model has the potential to significantly increase the amount of
funding that MFIs can leverage on a relatively small equity base.
A sub - variation of this model is where the MFI, as an NBFC, holds the individual loans on its
books for a while before securitizing them and selling them to the bank. Such refinancing
through securitization enables the MFI enlarged funding access. If the MFI fulfils the true sale
criteria, the exposure of the bank is treated as being to the individual borrower and the prudential
exposure norms do not then inhibit such funding of MFIs by commercial banks through the
securitization structure.
3.1.3 Banking CorrespondentsThe proposal of banking correspondents could take this model a step further extending it to
savings. It would allow MFIs to collect savings deposits from the poor on behalf of the bank. It
would use the ability of the MFI to get close to poor clients while relying on the financial
strength of the bank to safeguard the deposits. This regulation evolved at a time when there were
genuine fears that fly-by-night agents purporting to act on behalf of banks in which the people
have confidence could mobilize savings of gullible public and then vanish with them. It remains
to be seen whether the mechanics of such relationships can be worked out in a way that
minimizes the risk of misuse.
3.1.4 Service Company ModelUnder this model, the bank forms its own MFI, perhaps as an NBFC, and then works hand in
hand with that MFI to extend loans and other services. On paper, the model is similar to the
partnership model: the MFI originates the loans and the bank books them. But in fact, this model
has two very different and interesting operational features:
(a) The MFI uses the branch network of the bank as its outlets to reach clients. This allows the
client to be reached at lower cost than in the case of a standalone MFI. In case of banks which
have large branch networks, it also allows rapid scale up. In the partnership model, MFIs may
contract with many banks in an arms length relationship. In the service company model, the MFI
works specifically for the bank and develops an intensive operational cooperation between them
to their mutual advantage.
(b) The Partnership model uses both the financial and infrastructure strength of the bank to
create lower cost and faster growth. The Service Company Model has the potential to take the
burden of overseeing microfinance operations off the management of the bank and put it in the
hands of MFI managers who are focused on microfinance to introduce additional products, such
as individual loans for SHG graduates, remittances and so on without disrupting bank operations
and provide a more advantageous cost structure for microfinance.
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3.1.5 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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3.2 Product Design
The actual loan products need to be designed according to the demand of the target market.
Besides the important aspects are 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, MFIs sometimes prefer the basket cover,
since it can make the policies sound comprehensive. It includes assumptions the organizations
make with regard to operating costs, risk premiums, and reinsurance, and arriving to those
conclusions. It concerns whether 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. MFIs can combine a mandatory product with some voluntary features to make the
service more customer-oriented.
3.2.1 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 forclients 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.
3.2.2 MFIs managing 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 clientssavings at risk. Most MFISs provides theloans without or with smaller portion of deposit or, so for them repayment of interest or principal
is very risky. All MFIs 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.
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3.2.3 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 organizations strategic goals.
Encourages cost-effective decision-making and more efficient use of resources
3.2.4 Major Risks to Microfinance Institutions:
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This are the most significant risks (with the most potentially damaging consequences for the
MFI), how they interact, and current challenges faced by MFIs.
3.2.5 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 MFIs.
Credit risk: Credit risk, the most frequently addressed risk for MFIs, is the risk to earnings or
capital due toborrowerslate and non-payment of loan obligations. Credit risk encompasses both
the loss of income resulting from the MFIs 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 mitigatetransaction risk through borrower screening techniques, underwriting criteria, and quality
procedure for loan disbursement, monitoring, and collection.
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 managements inability to adequately anticipate and
plan for changes in funding sources and cash needs. Efficient Liquidity Managementrequires
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
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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 MFIs 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.
3.2.6 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 andshould 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.
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3.2.7 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.Governance risk: Governance risk is the risk of having an inadequate structure or body to make
effective decisions. The Financial crisis, described above illustrates the dangers of poor
governance that nearly resulted in the failure of that institution.
External business environment risk: Business environment risk refers to the inherent risks of
the MFIs 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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CHAPTER IV
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4.1 NABARD Initiative in Micro Finance
4.1.1 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."
4.1.2 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, planningand 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
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4.1.3 Organizational Structure
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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 NGOs etc.
NABARDs 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 MFIs in augmenting?
Earlier Banks and MFIs 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 MFIs were focusing on poor women.
As there are more Banks then the MFIs, 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 MFIs:
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 NGOs and other institutions
with the banks which earlier they were avoiding to meet.
NABARDs 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 MFIs:
NABARD gives loans to the MFIs after analyzing there rating and balance sheet.
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Conduct the workshop where the executive of the NABARD meet the executive and
employees of different Banks and MFIs and bring them together on the same podium.
NABARD gives the refinance to the MFIs also.
4.1.4 Managing the Repayment ratio:
Its very interesting to know the repayment structure of the NABARD. NABARD provides the
loan to the MFIs, 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%, lets
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.
4.1.5 Providing loan to the Institutions
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.
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4.2 Business model of GRAMEEN bank:
4.2.1 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. Grameens 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 andsolidarity. 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 ofpoverty every year., according to Grameens figures, nearly two-thirds [64 percent] of borrowers
who have been with Grameen for five years are now out of poverty. And Grameens indicators
of poverty are much more stringent than those of the World Bank, which defines poverty as
earning less than a dollar per day. Grameens 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.
4.2.2 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
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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 its a kind of social pressure exerted by the group
members. Grameen enjoys very high payback ratesover 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, youthprograms 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. 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 iscalculated 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
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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, ma ny
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:
16 Decisions of Grameen bank:
1. We shall follow and advance the four principles of Grameen Bank: Discipline, Unity, Courageand Hard workin 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
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
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4.2.3 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
4.2.4 Criticism of Grameen Bank:
As the Grameen model was exported overseas during the 1990s, 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 ofworking 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
purposesbusiness, 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 byGrameen branch managers to repay earlier loans.
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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.
To gain mutual understanding, develop trust and self-confidence.
To build up teamwork.
To develop leadership qualities.
4.3.3 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.
4.3.4 Condition required for membership for SHGs
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.
Womens 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).
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4.3.5
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.
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4.3.6
Explanation:
From the above figure we can notice the growth of SHGs in top 13 states. From 07 to 08 no of
SHGs 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.
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4.4 Business Model of SAKHI
4.4.1 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.
4.4.2 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.
3. Women Economic Development:
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Our objective is to strengthen womens 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
womens participation at village level.
4.4.3 Organization Structure
SAKHI had developed a systematic organizational structure for itself. The organogram below
reflects the organizations structure. The aim to have clear staff structure with clearly defined
role and responsibilities.
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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 12th installment. Repayment installment chart for
each size loan is available with the office
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4.4.4 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.
4.4.5 SAKHI strategy to 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 andIndian Bank charges 13.75% p.a. and from NABARD they get Grant.
4.4.6 Reason for SAKHI charging such a high rate of interest (18% p.a):
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. 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.
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CHAPTER V
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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 MicroFinance 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 forMFIs in India with proper rules and regulations.
3. There is huge demand and supply gap, in money demand by the poor and supply by theMFIs. 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 Governmentin 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 thisonly, 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 shouldbe 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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Webliography:
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.netwww.indiamicrofinance.com
www.gdrc.org www.accion.org
Research paper by Prabhu Ghate
Research paper by Vishal Sehgal Presentation by N. Srinivasan