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Xaviers College, Kolkata | 3rd Year Project Report

Microfinance and Financial Inclusion

Making Microfinance work

Ankit Gupta | Roll 306 | Room 12 Under the guidance of Professor P. P. Ghosh

.............................................................................................................................................2 Contents...............................................................................................................................2 Acknowledgements..............................................................................................................2 Objectives of Study..............................................................................................................3 Introduction..........................................................................................................................4 Delivery Models of Microfinance in India..........................................................................5 MFI Model...........................................................................................................................5 Self Help Group Bank Linkage Model:...............................................................................6 FINANCING MICROFINANCE IN INDIA.......................................................................7 How Microfinance Can Work for the Poor..........................................................................9 The Role of Corporate-Microfinance Institutions Partnerships in the Development of Value Chains......................................................................................................................12 SKS MICROFINANCE LIMITED...................................................................................21 Financial Inclusion.............................................................................................................29 MFIs & Financial Inclusion...............................................................................................29 SKS and Financial Inclusion..............................................................................................30 Conclusion.........................................................................................................................31

Firstly, I would like to thank my project guide Professor P. P. Ghosh for sharing his thoughts and guiding me throughout the project work. I would also like to thank my friends and family for their support and for providing me with the necessary data which I 2|Page

could include in my project work. They helped me out with different articles on my project topic and suggested website names which were of great use in completing this project. I thank St. Xaviers College, Kolkata for providing me the opportunity for doing this project work.

Objectives of Study
The paper investigates how partnerships between microfinance institutions and the corporate sector can build up value chains in India, which in turn, would empower the constituents of the bottom of the pyramid segment. The paper also highlights that most of the early microfinance in India happened through donor and philanthropic funds which came in through not-for-profit organizations. But as activities scaled up, it was imperative to move to greener pastures. The broad objectives of the study are enumerated below: 1. 2. 3. To obtain a broad overview of the mechanics of microfinance To understand the delivery modes of microfinance in India To have an overview of the structure and working of corporate microfinance institutions and public-private partnerships in the area


4. 5.

To have a real-time understanding of microfinance institution (SKS Microfinance)




To have an overview of the reach of Microfinance in India and the way forward.

India has 800 million poor people who live on the brink of subsistence. This is one of the largest populations of poor in the world. The bottom 5% of Indias poor, considered ultra poor, face even deeper levels of chronic hunger, persistent poor health and illiteracy. To cope with their vulnerability, the poor have no choice but to take loan for consumption and income generation from money lenders that charge exploitative rates of interest. This can put the poor in a debt trap. If poor people can access loans with fair interest rates, they could break out of the cycle of poverty. Bureaucracy, corruption, illiteracy and challenging logistics prevent the poor from accessing loans from banks and the government. Microfinance in India started in 1974 in Gujarat as Shri Mahila SEWA (Self Employed Womens Association) Sahakari Bank. Registered as an Urban Cooperative Bank, they provided banking services to poor women employed in the unorganised sector. Microfinance later evolved in the early 1980s around the concept of informal Self-Help Groups (SHGs) that provided deprived poor people with financial services. From modest origins, the microfinance sector has grown at a steady pace. Now in a strong endorsement of microfinance, the National Bank for Agriculture and Rural Development (NABARD) and Small Industries Development Bank of India (SIDBI) have committed themselves to developing microfinance.


The microfinance sector has been "witnessing a tremendous growth" during the last few years in India in terms of loan portfolio, geographical area and outreach. With Indias GDP growing at the rate of 7.1 % the countrys socio-economic pyramid is turning around the story with millions of poor people becoming entrepreneurs. To most, microfinance means providing poor families with very small loans (microcredit) to help them engage in productive activities to grow their tiny businesses. Over a period of time, microfinance has come to include a broader range of services (credit, savings, insurance and others) as it has been realised that the poor, who lack access to traditional formal financial institutions require a variety of financial products. Microfinance started with the recognition that poor people had the capability to lift themselves out of poverty if they had access to affordable loans. High repayment rates in the industry have changed the perception that the poor are not credit worthy. With the right opportunities, the poor have proved themselves to be productive and capable of borrowing, saving and repaying, even without collateral.

Delivery Models of Microfinance in India

MFI Model
The MFI model has gained significant momentum in India in recent years and continues to grow as the viable alternative to SHGs. In contrast to an SHG, an MFI is a separate legal organization that provides financial services directly to borrowers. MFIs have their own employees, record keeping and accounting systems and are often subject to regulatory oversight. MFIs require borrowers from a village 5|Page

to organize themselves in small groups, typically of five women, that have joint decision making responsibility for the approval of member loans. The groups meet weekly to conduct transactions. MFI staff travel to the villages to attend the weekly group meetings to disburse loans and collect repayments. Unlike SHGs, loans are issued by MFIs without collateral or prior savings. MFIs now exist in a variety of legal forms, including trusts, societies, cooperatives, non-profit NBFCs registered under Section 25 of the Companies Act, 1956, or Section 25 Companies, and NBFCs registered with the RBI. Trusts, cooperatives and Section 25 companies are regulated by the specific act under which they are registered and not by the RBI.. Attempts have been made by some of the associations of MFIs like Sa-Dhan to capture the business volume of the MFI sector. As per the Bharat Micro Finance Report of Sa-Dhan, in March 2009, the 233 member MFIs of Sa-Dhan had an outreach of 22.6 million clients with an outstanding microfinance portfolio of INR 117 billion (USD 2.5 billion).

Self Help Group Bank Linkage Model:

The microfinance movement started in India with the introduction of the SHG-Bank Linkage Programme in the 1980s by NGOs that was later formalized by the Government of India in the early 1990s. Pursuant to the programme, banks, which are primarily public sector regional rural banks, are encouraged to partner with SHGs to provide them with funding support, which is often subsidized. A selhelp group, or SHG, is a group of 10 to 20 poor women in a village who come together to contribute regular savings to a common fund to deposit with a bank as collateral for future loans. The group has collective decision making power and obtains loans from the partner bank. The SHG then loans these funds to its members at terms decided by the group. Members of the group meet on a monthly basis to conduct transactions and group leaders are responsible for maintaining their own records, often with the help of NGOs or government agency staff.



Microfinance in India has grown at a tremendous pace in recent years, achieving significant outreach amongst the poor as well as non-poor (but low-income) households across the country. Linkages between banks and self-help groups (SHGs) supported by the National Bank for Agriculture and Rural Development (NABARD), on the one hand, and Microfinance Institutions (MFIs), on the other, have emerged as the two most prominent means of delivering microfinance services in India. Growth in terms of outreach across both models has been very high. The growth of MFIs in India has been greatly restricted by the inadequate capacity of a number of MFIs to access loan funds from interested lenders. This restriction is caused by raters or lenders assessment of the MFIs limited management capacity, or the poor quality of MFI loan portfolios or even the lack of potential for expanding microfinance in the MFIs area of operations. However, a key concern resulting in the inadequate inflow of loan funds has been the perception of high risk in MFI operations on account of their poor capital adequacy position. Since most MFIs in India were initially NGOs involved in grant-based welfare activities they had a modest beginning, supported by grants and small loans as seed money provided by institutions with social motives. During the time MFIs were substantially grant-funded institutions, the perceptions of the financial market were not so much a concern. However, as the scale of operations of the MFIs increased, they borrowed increasing proportions of their on-lending funds and their net worth position in relation to their overall loan portfolio became a matter of interest. Since, in recent years, the net worth position has not grown at the same rate as the loan portfolio, interest has turned to concern. The lack of growth of net worth has happened mainly on account of an I. Inadequate inflow of grants for microfinance operations, owing to the perceived commercial nature of microfinance programmes, II. High initial operating costs of MFIs resulting in a high level of accumulated losses adversely affecting their net worth position, and 7|Page

III. The legal status of the NGO/MFI, which inhibits the flow of investors equity.

Move from Not-for-profits to for-profits: The methodology

When we look at the past two decades of microfinance, we find three distinct waves of action. The first wave was when people who were working in the development sector discovered the methodology of reaching micro-loans to the poor through a methodology that was mastered by Grameen Bank. The wave 2 came in when the first generation organizations reached scale and sought methods to morph into for-profit commercial organizations. The wave 3 is when mainstream commercial institutions like L&T finance, Equitas and the private equity players started looking at microfinance as an interesting business. The basic methodology being used in commercial microfinance in India was innovated by Grameen Bank and later improvised by several players. This methodology involved the following elements: 1. Identify the potential customer. This was to be done by using a poverty index, thereby ensuring that the customers had a great deal of homogeneity 2. Organize them into groups so that they could address the issue of information asymmetry and lack of collaterals by transferring what could be an individual liability into a group liability and hold the group morally responsible for repayment through a process of public oath. 3. Have standardized products, standardized operating systems and enforce discipline; ensure that the exceptions were dealt with severely.


How Microfinance Can Work for the Poor

The power of microfinance In the past few years, microfinance has been widely heralded as a successful contributor to the alleviation of poverty and a valuable tool for achieving the Millennium Development Goals (MDGs). And with good reason: scores of studies have shown the positive impact that microfinance can have on the lives of poor people. A World Bank study of three microfinance institutions (MFIs) in Bangladesh, for example, found that 40% of the entire reduction of rural poverty over 14 years was directly attributable to microfinance. Microfinance provides people with access to credit and other financial services to start and grow businesses, build productive assets, and better cope with financial shocksat interest rates typically well below those charged by traditional moneylenders. Moreover, microfinance institutions strive to serve those most in need. Of the more than 113 million microfinance clients around the world, it is estimated by the Microcredit Summit Campaign that about 84% are women and about 72% are very poor (in the bottom half of those living below their countrys poverty line, or below US$1 a day). Microfinance alone is not enough While access to financial services is undeniably powerful, credit and savings products address only one factor of many constraining the 9|Page

poora lack of liquidity. Increasing income and assets alone is a slow and insufficient strategy for combating serious issues such as childhood malnutrition, avoidable maternal and neonatal mortality, the spread of HIV/AIDS and suffering due to preventable illness such as diarrhea and malaria. The poor need access to a coordinated combination of microfinance and other development services to increase income, build assets and improve health, nutrition, family planning, education, social support networks and more. The integration of complementary services intended for the same population can lead to enhanced operational efficiencies and synergies of benefits. The question is how to develop a scaleable strategy for delivering integrated microfinance and other services that meet the multifaceted needs of poor people. New era of integrated development services At the halfway point on the MDG timeline, overall progress has been disappointing. Achievement of the goals by 2015 will call for new and innovative ways of working rather than more of the same. A strategic, overarching strategy to address poor peoples interrelated needs through creative partnerships that build on the best of different development sectors has the potential to lead to exponential rather than incremental reduction of poverty in the developing world. Ideally, the over 3,000 existing microfinance institutions worldwide could provide an infrastructure or platform for reaching the poor through a coordinated combination of services. MFIs recognize the need, hear the demand and have a vested interest in cultivating a healthy, successful clientele with strong microenterprises. Poverty and ill health Poverty and ill health are intertwined and, as such, must be addressed in tandem. In the 2002 World Bank study, Dying for Change, illness was the most commonly cited reason for a downward slide into poverty ahead of losing a job, which took second place. The poor are more likely to be exposed to health risks because their work is physically demanding and often dangerous. But they are least likely to be able to afford health care when they are injured or fall ill. Yet people often have no choice but to spend what little they have when injury or illness strikes. In a study conducted in Kenya, it was found that households in the bottom 20% of the socioeconomic scale spent more than 10% of their total expenditures on acute illnesses and that about 30% of households faced potentially catastrophic cost burdens as a result of illness. In research conducted by Freedom from Hunger in Bnin and Burkina Faso in 2006, it was found that poor microfinance clients spent an average of 30% of their annual income to combat 10 | P a g e

malaria alone. And according to another study in Thailand, 35% of households experiencing an AIDS-related death felt a serious impact on agricultural production, leading to a 48% reduction in family income. Ill health leads to lost productivity, which leads in turn to reduced earnings with which to prevent and treat illness. Neither improved financial stability alone nor better access to health education, products and services alone can solve the problem. The inextricable link between poverty and ill health makes a multisectoral solution paramount. Microfinance as a development platform While microfinance is not a development panacea, it offers a robust platform for the delivery of complementary services that are needed and frequently requestedby poor people. MFIs serve millions of poor people, especially women, on a regular basis, often extending their services to isolated, hard-to-reach places. What is more, the microfinance sector is focused on market-based business principles and financial self-sufficiencyproviding demanded services at a price that is affordable to clients but also covers the institutions operational costs. MFI clients repay their loans at astonishingly high rates, and their loyalty to and trust in the institution tend to be very strong. Many MFIs provide financial services to groups of clients, who mutually guarantee each others loans. These groups meet frequently to make loan repayments and deposit savings with the guidance of MFI field staff. Such regular meetings offer excellent opportunities for the provision of add-on services, such as training in health or financial management. This combination of a vast and rapidly growing network of distribution to hard-to-reach, loyal, economically active groups of poor people, a steady revenue flow from interest earnings, and the drive to develop market-based products that pay for themselves, makes microfinance an attractive core component of a development program that draws on the principles of self-help to alleviate poverty. Multifaceted and sustainable solutions to poverty allevation Recognizing the vicious cycle of poverty and ill health, and witnessing its impact on clients ability to repay, flourish, build assets and pull themselves out of poverty, some microfinance institutions have added nonfinancial services, such as dialogue-based education and linkages to health products and providers, to impressive effect. It offers a range of health-related needs, as expressed by poor women in developing countries, and the complementary products and services that MFIs can offer in response, alongside microfinance services.

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The Role of Corporate-Microfinance Institutions Partnerships in the Development of Value Chains

Introduction The paper investigates how partnerships between microfinance

institutions and the corporate sector can build up value chains in India, which in turn, would empower the constituents of the bottom of the pyramid segment. Clients of microfinance institutions can be empowered as producers and consumers at a grassroot level, as of the result of the partnerships with the corporate sector.

The MFI-corporate partnerships are symbiotic on the following grounds: i. The corporate sector can leverage MFIs domain knowledge of capacity building and vast client base; ii. MFIs, for their part, can benefit from the corporate partners supply chain linkages, which would strengthen value chains for the BoP.

Creating retail networks through MFIs

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companies and consumer durable manufacturers. Thus, the corporate sector can leverage MFIs geographically well-fanned out client base in order to tap rural markets. However, value chains developed solely for distributing products among MFI clients may not yield long-term socioeconomic benefits to the bottom of the pyramid segment, opined Kishore Mangalvedhe, the CEO of Larsen and Toubro Microfinance. MFIs can provide micro-loans in order to enable rural consumers to purchase newly launched FMCG/ durable products. Alternatively, MFIs can directly sell products to end-users, which would ultimately be inimical to micro-loan borrowers who run small retailing units ( kiranas). There are cases of MFIs procuring FMCG products in bulk at a special discount, which can be sold by micro-entrepreneurs. On an average, the market size of each village is negligible and hence, kiranas are unlikely generate substantial demand for FMCG products. There is likelihood of micro-entrepreneurs borrowing excessively in order to procure products in bulk. This may lead to the intensification of competition among kirana owners and the market share of each player would ultimately diminish due to the limited scope for expansion in each village. The working capital required by a kirana owner is usually in the range of Rs 10,000 to Rs 15,000. Many of L&T Microfinances borrowers are fruit and vegetable vendors, who cater to very miniscule market segments. It would be more viable for the MFI to increase its breadth of outreach among kirana owners across various regions than to enhance the depth of outreach in each region. While theres much scope for distributing FMCG and durable products to self-help groups through corporate collaborations, the MFI Grameen Kootas Project Manager, Vikash Kumar, has voiced his concerns about indiscriminate usage of micro-loans solely for consumption purposes. Arun Raste, the Corporate Communications Head of Kotak Mahindra a private sector bank, which funds MFIs reasoned that rural households with surplus income would have an excessive demand for consumption 13 | P a g e

credit, if MFIs help promote FMCGs/ consumer durables. Arguably, the sudden influx of such products would adversely affect the practice of thrift among rural households and in extreme cases, exacerbate the conditions of rural indebtedness.

Products and services targeted at rural consumers According to Kishore Mangalvedhe, BoP-based value chains can be tapped by providing credit for the purchase of low cost water purifiers and mobile phones. Products also need to be customized to meet the requirements of rural consumers. Mangalvedhe cited the example of mobile handsets, which are emerging popular across rural India. He pointed out that a rural mobile user would need a battery back-up of a longer duration, as many households across villages still lack access to electricity. Grameen Koota, an MFI which operates extensively across Karnataka and Maharashtra, serves over 300,000 clients. Companies can leverage Grameen Kootas social mobilization skills to penetrate into rural areas, explained the MFIs project manager, Vikash Kumar. In order to improve the standard of living of its clients, the organisation partnered a US-based clean energy company Envirofit to distribute fuel-efficient stoves, which would reduce home-makers dependency on firewood for cooking. Envirofit has a network of local dealers who market and distribute the stoves. Grameen Koota disburses emergency loans in the denomination of Rs 1000 to customers across 34 branches to finance the purchase of Envirofit stoves (which are available at a price range of Rs 700 to Rs 2500). Around 2500 stoves have been sold to Grameen Kootas clients and field officers have cited a steady increase in demand in rural households. Selco, a Bangalore-based social enterprise specializing in alternative energy, has recently tied up with Grameen Koota to propagate the use of solar-powered products in 14 | P a g e

rural Karnataka. The Project Manager of Grameen Koota, Vikash Kumar, segment alternative said Microfinance about the institutions and alternative of energy low-cost energy. companies should focus on educating the bottom of the pyramid benefits

Strengthening value chains through micro-entrepreneurship

Value chain development can be enhanced through partnerships between entrepreneurs and NGOs. The founders of the Swedish company Marktech AB have hired the MFI-NGO Hand in Hands selfhelp groups to manufacture teddy bears (which is marketed under the brand name Bo-Bear). The product is designed in accordance with Marktechs specifications. Hand in Hand is fully responsible for the procurement and import of components, the manufacture and export of the finished product. The self-help groups are involved in the production of Bo-Bears. Hand in Hand imparts tailoring and quality control skills to its self-help groups, who, as a result, would be able to comply with Marktechs specifications. The finished products are shipped back to Sweden and are subsequently distributed. Daniel Jesudason, coordinator of Hand in Hands Bo-Bear production unit, explained that the teddy bears are not yet promoted as fair trade products, as some of the raw materials are sourced from developed countries. However, the womens self-help groups are remunerated as per fair trade norms. The Bo-bear is positioned as a niche, charity product, in export markets, which are concentrated in the US and Western Europe. Hand in Hand does not distribute micro-loans to self-help group members who are employed in the Bo-Bear unit, since the Swedish firm Marktech provides the necessary raw materials and equipment. The value chain co-created by 15 | P a g e

Hand in Hand and BoBear has socially and economically empowered rural women. One of the key challenges would be to scale up the production through the existing supply chain.

Low credit penetration coupled with limited market access Hemantha Kumar Pamarthy, Managing Director of Hand in Hand, who has several years of experience in marketing FMCG products, cited the following hindrances to the development of rural value chains: i. ii. The rural producers lack of knowledge of market trends and competition Low standards of hygiene and packaging in rural manufacturing units iii. Lack of access to raw materials.

Value chain development at the micro-enterprise level is still at a rudimentary phase due to the lack of access to credit and market linkages, explained Dili Babu, Team Manager of the Bharatiya Yuva Shakti Trust, a non-profit organization backed by the Confederation of Indian Industries. Banks, which have stringent stipulations on the provision of collateral and documentation, are seldom approached by micro-entrepreneurs. Micro-entrepreneurs, for their part, tend to have a limited understanding of the market trends. With the intent of nurturing first generation entrepreneurs, BYST provides seed capital without demanding a financial down-payment or collateral. The trust has tied up with a public sector bank under a credit guarantee scheme

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to disburse loans to micro-enterprises. Micro-entrepreneurs availing of BYST schemes mostly hail from the bottom of the pyramid segment. Mentoring role of the corporate sector The Bharatiya Yuva Shakti Trust assigns mentors who can guide aspiring entrepreneurs to build up their businesses. The mentors have several years of experience in the corporate sector and they provide necessary guidance in finance, marketing and various other functional areas of management. While MFIs have increased their outreach among micro-entrepreneurs, very few organizations don the role of mentors, opined Dili Babu, team manager of BYST. Some of the microentrepreneurs have gone on to scale up their businesses with venture capital funding from the International Finance Corporation. MFIs may benefit by replicating Bharatiya Yuva Shakti Trusts mentorship programme, which has been launched across all of the regional chapters of the CII. One-to-one mentorship by corporate sector would be required for enhancing the growth and diversification of micro-enterprises. MFIs and the Indian business community can strengthen micro-enterprise value chains through: i) Capacity building for micro-entrepreneurs in marketing, finance ii) Provision of seed capital for sustainable business ventures iii) Creating market linkages, whereby the corporate sector can procure raw materials/ finished products directly from micro-enterprises iv) Enabling successful micro-enterprises to graduate into small and medium enterprises by providing access to venture capital Challenges of scaling up agricultural value chains

Hand in Hand has formed 30,000 self-help groups consisting of small and marginal farmers in order to scale up the agricultural value chain 17 | P a g e

across Southern India. Capacity building is a core focus area in the agricultural sector, since the output of small farm units has declined due to the rise in labour costs, excessive fragmentation of land, lack of economies of scale and poor soil quality. The small scale farmers are predominantly dependent on moneylenders, who charge usurious interest rates. The above constraints have deterred companies from partnering small-scale farmers. Hand in Hand has imparted training to farmers in organic farming and crop rotation techniques with financial backing from the Dutch entrepreneurial development bank FMO. In the recent past, the organisation had partnered the retail chain Foodworld (which is now rebranded as Spencers Daily), whereby its self-help group members supplied agricultural produce directly to the retailer. Hand in Hand provides cattle loans and crop insurance in collaboration with stateowned insurance companies. A 3.5 per cent premium is levied for insuring cash crops such as sugarcane, cotton, potatoes, oilseeds, pulses and cereals. The corporate sector has not tied up with small scale farmers due to the lack of quantity and quality, observed N. Shivakumar, Hand in Hands FMO and Special Projects Director, adding that theres scope for farmers to form a consortium or federations in order to supply vegetables and fruits to large-scale retail chains. He also noted that agricultural value chains can be strengthened during the stages of production and distribution through MFI-corporate partnerships. Hand in Hand has rendered microfinance and capacity building services for dairy farming and vegetable cultivation. The NGO has a pivotal role to play during the various phases of value chain development in the agricultural sector. Dairy farmers obtain micro-loans from L&T Microfinance to purchase cows and cattle feed. A leading dairy company in South India has partnered the MFI in order to procure milk from farmers. The dairy company pays Rs 3000 directly to the farmer and Rs 1000 to L&T 18 | P a g e

Microfinance, which is the repayment of the micro-loan provided to the farmer. The Indian dairy market is predominantly unorganized and most dairy cooperatives and companies do not have a pan-Indian presence. Thus, an MFI, which is expanding aggressively across the country, may not profit much by partnering merely one regional dairy player. Mangalvedhe stated that an MFI operating across several states should enter into multiple partnerships in the dairy sector. L&T Microfinance, which is striving to have a pan-Indian presence, plans to expand geographically rather than confining its operations to a specific region. While multiple partnerships in the unorganized dairy sector would be help L&T increase its market share across the country, the MFI would also find synergies in partnering corporate players, which are already well-established across diverse regions.

CSR-based partnerships

Hand in Hand is currently partnering the private sector to implement corporate social responsibility projects. Salcomp, a manufacturer of cellphone charger, has tied up with Hand in Hand to sponsor projects entailing rural sanitation and the refurbishment of primary health centers. The Bharatiya Yuva Shakti Trust has been involved in CSRbased projects. Saint Gobain, which has a manufacturing plant on the outskirts of Chennai, has availed the services of five microentrepreneurs backed by the trust, as part of a CSR initiative. However, the scope for building up rural value chains remains largely untapped, as the corporate sector has a limited understanding of NGOs. Companies should be willing to outsource their work to NGOs, affirmed Hemantha Pamarthy. Capacity building for micro-enterprises remains Hand in Hands core focus area and many of its self-help group members are running profitable micro-enterprises. The MFIs womens self-help group members run a unit called Crisp Bakery, which supplies confectionary items to Hyundai, Nokia and other 19 | P a g e

leading corporate players. The companies are able to fulfill their CSR mandate by purchasing products from micro-enterprises, explained Pamarthy. Hand in Hand plays an intermediary role by providing microenterprises market access to institutional buyers. Partner companies, return, can promote small-scale entrepreneurs hailing from the local community. It would be pertinent to determine whether the on-going CSR initiatives can, in the long-run, metamorphose into full-fledged partnerships with Hand in Hand, which, in turn, would empower producers and consumers at the bottom of the pyramid on a larger scale and help create sustainable rural value chains. MFIs and companies, which are involved in the implementation of CSR projects, may explore further possibilities of jointly strengthening rural chains. The on-going CSR projects would enable the private sector player to gain a better understanding of the socio-economic conditions and consumption patterns of the MFIs self-help group members. The MFI can give its corporate partner an overview of the usage of financial products and income generation activities of its clients.

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Microfinance is an effective tool that can help reduce poverty and spread economic opportunity by giving poor people access to financial services, such as credit and insurance. SKS distributes small loans that begin at Rs. 2,000 to Rs. 12,000 (about $44-$260) to poor women so they can start and expand simple businesses and increase their incomes. Their micro-enterprises range from raising cows and goats in order to sell their milk, to opening a village tea stall. SKS uses the group lending model where poor women guarantee each others loans. Borrowers undergo financial literacy training and must pass a test before they are allowed to take out loans. Weekly meetings with borrowers follow a highly disciplined approach. Re-payment rates on our collateral-free loans are more than 99% because of this systematic process. SKS also offers micro-insurance to the poor as well as financing for other goods and services that can help them combat poverty. Approach SKS believes that access to basic financial services can significantly augment economic opportunities for poor families and in turn help improve their lives. SKS is committed to creating a distribution network across underserved sections of society in order to provide easy access to the full portfolio of microfinance products and services. It also looks at using this network to add value to the lives of its members by providing quality goods and services that our members need at less than market rates.

SKS Microfinance follows the Joint Liability group Model. The methodology involves lending to individual women, utilising five 21 | P a g e

member groups where groups serve as the ultimate guarantor for each member. Our approach is to provide financial services at the doorstep of members in villages and urban colonies. This allows the poor convenience and savings in terms of cost and time associated with travelling to mainstream banks and enables SKS staff to promptly and fully collect repayments. Our loans are designed for convenience with small weekly repayments corresponding to cash flows. Small first loans inculcate credit discipline and collective responsibility. Interest and loan repayments are simplified for easy comprehension.

rom village selection to loan disbursal, SKS follows a clear process in its operations.

Operational methodology:

Village Section
Before starting operations, our staff conduct village surveys to evaluate local conditions like population, poverty level, road accessibility, political stability and means of livelihood.

Projection Meeting

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After a village is selected, SKS staff introduces the community to its mission, methodology and services.

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

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

Compulsory Group training (CGT)

CGT is a four-day process consisting of hour-long sessions designed to educate clients on SKS processes and procedures and to also build a culture of credit discipline. Using innovative visual and participatory teaching methods, SKS staff introduces clients to our financial products and delivery methods. CGT also teaches clients the importance of collective responsibility, how to elect group leaders, how to affix signatures, and a pledge that serves as a verbal contract between SKS and its members. During this training period, SKS staff collects quantitative data on each client to ensure qualification requirements are met, as well as to record base-line information for future analysis. On the fourth day, clients take a Group Recognition Test conducted by a different staff member than the one who trained them. If they pass, they are officially accepted as SKS members.

Centre meetings
As additional groups are formed within a single village, a Centre (sangam) emerges. During Centre Formation, groups are combined to form a centre of 3 to 10 groups or 15 to 50 members. Weekly Centre meetings serve as a time to conduct financial transactions. Meetings are held early in the morning, so as to not interfere with clients daily activities. 23 | P a g e

A leader and deputy leader are selected to facilitate meetings and ensure compliance with SKS procedures. In addition to financial transactions, members use the weekly meetings to discuss new loan applications and community issues. Centre meetings are conducted with rigid discipline in order to sustain the environment of credit discipline created during CGT.

Products and Services Offered

SKS serves millions of poor women across tens of thousands of villages and urban slums in India through an innovative combination of using a for profit model, drawing on best practices from the business world and deploying technology.SKS Microfinance Ltd offers a range of products and services, which have been developed based on the financial needs of working of poor women.

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Product Income Generation Loans (IGL) Aarambh

Features Loans range from Rs. 4,000 to Rs. 10,000 for the first loan; subsequent loan amounts determined by past credit history and increased each in set increments upto a maximum of Rs. 26,000 Term of the loan is 50 weeks with principal and interest payments due on a weekly basis 12.5% flat interest rate / 24.55% annual effective interest rate

Benefits Provides self-employed women financial assistance to support their business enterprises, such as raising livestock, running local retail shops called kirana stores, providing tailoring and other assorted trades and services

Mid-Term Loan amounts range Loan (MTL) from Rs. 2,000 to Rs. Vriddhi 14,000 in each annual cycle. Available any time after the completion of 20 weeks & before 40 weeks of an IGL cycle Term of the loan is 50 weeks with principal and interest payments due on a weekly basis 12.5% flat interest rate / 24.55% annual effective interest rate Emergency Loans and Advances 25 | P a g e

Provides self-employed women financial assistance to support their business enterprises, such as raising livestock, running local retail shops called kirana stores, providing tailoring and other assorted trades and services

Interest free Designed to meet the emergency loans range unforeseen emergency from Rs. 500 to Rs. requirements of members


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

Life Insurance Loans

Interest free loans of Rs. 500

Issued to members to pay their life insurance premiums during the initial 25 week period

Term of 25 weeks with principal repaid weekly Helps to promote habit of savings and reduction of vulnerability among members Mobile Loans Financing of mobile phones and telephone services Loan amounts range from Rs. 1,500 to Rs. 3,000 26.14% annual effective interest rate and loan processing fee of 1% Term of 25 weeks Sangam Store Loans Working capital loans ranging from Rs. 1,000 to Rs. 12,500 Interest free Term of the loan is 14 days The program allows these members to purchase their inventory of consumer goods and groceries from a national wholesaler at wholesale prices Provides a working capital loan to fund the needs of our members who own and operate kirana stores Provides financing for mobile phones and telephone services to our members

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Housing Loans

Loans range from Rs. 50,000 to Rs. 150,000 Members must have completed at least 3 IGL cycles to qualify or one ILP to be completed Term of loan is 3 to 5 years with principal and interest payments due on a monthly basis 11.9% flat interest rate, 21% annual effective interest rate In addition, loan processing fee of 2% collected upfront

Provides financial access to women for construction of new houses or improvement & extension of existing houses

Per RBI circular DNBS. 204/CGM (ASR)-2009 dated January 2, 2009.

Numbers and Statistics

In the last year alone, SKS Microfinance grew nearly 170 % in terms of loan disbursements, while maintaining a 99% on-time repayment rate. It is one of the fastest-growing microfinance organisations in the world. The most important way to improve the lives of the poor is through economic development. It is the foundation on which other human development - such as education and health - can be built. SKS is improving the lives of more than 6 Million members through microfinance, which in turn fosters economic development. Each member is able to use microfinance to make a better life for herself and her family. Microfinance enables people to earn income and build assets, which means families eat better, they can afford health care, and children are more likely to attend school. Within the microfinance sector, SKS has been able to distinguish itself through its performance.It has successfully applied methods from the business world, such as the use of standardisation and automation, to build an organisation that leads the microfinance industry in a number 27 | P a g e

of areas, including rapid growth, high quality service to our members, streamlined delivery, transparency and innovative products

Operational and Financial Information

Operational Information Total no. of Branches Total no. of Districts Total no. of Staff

FY10 2,029 341 21,15 4 6,780

FY09 1,353 307 12,81 4 3,953

FY0 8 770 219 6,81 8 1,87 9 1,68 0 1,05 1

FY0 7 276 103 2,38 1 603

Total No. of Members (in '000) Amount Disbursed for the period (INR crores) Portfolio outstanding (INR crores)* * includes assigned loan portfolio Financial Information Revenue (INR crores) PAT (INR crores) Assets (INR crores) Networth (INR crores)







FY10 958 174 4,055 950

FY09 554 80 3,039 665

FY0 8 170 17 1,08 9 212

FY0 7 46 2 335 71

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Financial Inclusion
Financial inclusion which means the availability of affordable basic financial services like banking, insurance to all, has been long on the agenda of successive governments in India. Time and again the government has taken steps to facilitate this. The nationalisation of major private sector banks in 1969 was the first major initiative in this direction. In 1975, the government set up Regional Rural Banks and today we have 14,475 rural banks in the country of which 2126 (91%) are located in remote rural areas. The government also introduced banking guidelines that require banks to extend 40 percent of their net bank credit to priority sector. In more recent times, it has eased KYC norms and introduced no-frills savings account for six million low-income families across 155 districts. However, as a nation we still have only 34 percent of our population that has access to banking services. A recent IFMR study shows that a significant percentage of the no-frill accounts , once opened, are neither accessed nor operational. The main reason for financial exclusion is the lack of a regular or substantial income. In most of the cases people with low income do not qualify for a loan. The proximity of the financial service is another fact. The loss is not only the transportation cost but also the loss of daily wages for a low income individual. Most of the excluded consumers are not aware of the banks products, which are beneficial for them. It is very difficult for a low income individual to find collateral for a bank loan. Moreover, banks give more importance to meeting financial targets. So they focus on larger accounts. It is not profitable for banks to provide small loans and make a profit.

MFIs & Financial Inclusion

Microfinance institutions which have a network across low-income groups in the country and a proven method of successful operation, would be the ideal vehicles for banks to achieve their financial inclusion goals. Using the Business Correspondent and business facilitator models, banks can reach out to these sections with very little risk and without incurring huge operational costs. 29 | P a g e

MFIs, due to the section of people they work with and the hiring policies they follow, end up creating a significant social impact. By lending solely to women, they influence the social equations within the basic social unit of the family. Once women begin contributing to the family income, they start playing a more significant role within the family and become part of decision-making. On a larger scale, since MFIs lend to the economically disadvantaged sections, they end up lending to a larger number of Scheduled Castes, Tribes and Backward Communities. Since they hire staff from the sections they serve, they also provide employment opportunities as well amongst these Communities.

SKS and Financial Inclusion

Over the last decade, SKS has established its operations across 341 districts in 19 States out of which 315 have been identified by NREGA as the poorest. SKS services reach out to millions of poor including Backward-Scheduled Castes. Approximately 57.3% of our members belong to the weaker section of Indian society. Amongst our employee base, many of them belong to Backward Castes and Scheduled Castes. Many of our employees are children of our members.

Towards Financial Inclusion

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Microfinance that helps improve income-generation opportunities for the poor has a long history in the country, but in the recent past, it has come in the news for wrong reasons. As more and more people reach out to microfinance institutions, the financial aspects of microcredit are routinely highlighted to explain the success and failures of the schemes. The guiding principle behind microcredit is to create entrepreneurs among the poor so they can carry out gainful economic activities, generate employment and build trust. Through inclusive growth, microcredit spurs economic activities in rural areas and can be considered a potent tool for socioeconomic development. The ultimate aim is to eliminate the dependence of the poor on microcredit and eventually help them qualify for receiving normal institutional credit. But is that what happens? What usually happens is that people take multiple loans to repay old loans, pay health bills or repair homes. As adequate checks on 'absorption capacities' are not carried out, it is not possible to curtail incidents such as the suicides in Andhra Pradesh by overindebted clients of microfinance 31 | P a g e

institutions (MFIs). Now, the question arises: has microcredit been inappropriately used to 'induce and trap' borrowers to pursue activities in areas and at a scale through which it is not possible for them to even 'service' their debt? Going by the experience of the joint liability groups (JLGs) and selfhelp groups (SHGs) in Andhra Pradesh, a report of the Reserve Bank of India subcommittee set up to study issues and concerns of MFI sector indicates that only about a quarter (25.6% for JLGs and 25.4% for SHGs) of loan was used to undertake direct income generation activities; rest was used for other activities such as repayment of old loans (25.4% for JLGs and 20.4% for SHGs), health (10.8% and 18.6% respectively), home improvement (22.1% and 13.0% respectively) and education (4.4% and 5.7% respectively). The subcommittee was set up under the chairmanship of Y M Malegam. If we go by the above-mentioned report, there is a need to change the mindset of people that see microcredit programmes as antipoverty programmes. It should be recognised that microcredit schemes - both implemented Nabard SHG-type programmes and the private not-for-profit MFIs - can be potent instruments for strengthening inclusive finance in rural areas and have the capacity to bring out the latent growth potential of the rural population, including the poor. But that can happen only if the economic aspects fully complement social aspects. In short, stakeholders have to become true business partners of the borrowers and take certain responsibility for their business failure. Otherwise, the percentage of default on repayment of loans may rise higher even if interest rates are low, benefitting no one.

Microfinance should be treated with utmost seriousness and at par with a normal business activity financed by institutional commercial credit. There is a need to comprehensively study several aspects of microcredit and its use. Some of these that need to be addressed are: What activities are pursued through microcredit?

Do they know enough about the marketability of their products and services? - What has been the income-generating record of the activities over 32 | P a g e

time? - Are they aware of the importance of better quality, userfriendliness, design or productivity of their product and services on sustainability of their business? - Are they being assisted by any of the stakeholders in the above areas? - Have they progressed in their business? What are the constraints they have faced? As far as we know, no information is available on these issues. How can we formulate strategies on strengthening micro activities if we do not have access to such information? The total outstanding microcredit in 2010 has been 22,500 crore against a total demand of 50,000 crore. Such a huge amount of resources should be used productively. It is a pity that we do not know anything about their distribution by activity types. National institutions such as Nabard should start collecting information on the 'real' side of microcredit to ensure that a strategy can be made and this modality of financing can become a prime instrument of 'inclusive growth' through 'inclusive finance'. Microfinance should be able to transform poor borrowers into micro-entrepreneurs with positive contribution to the country's economic growth. But this will not happen with just wishful thinking. Stakeholders have to shoulder considerable responsibility in addition to providing finances and collecting repayments. Stakeholders, in this context, mean the government, banks, SHGs, MFIs and donors. It should be their joint responsibility to put microcredit on a productive footing similar to what we expect from 'performing institutional loans'. The big question is how do we do it? Sufficient information is required before specific steps can be taken. Yet, there is no denying that institutional reform is imperative and coordinating the activities of the institutions that are already out there and those that may come up to work in favour of the small borrowers so that they continue to do 'good business' will be a task.

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