PROJECT ON MICROFINANCE IN INDIA

SUBMITTED TO: Prof. Reena Agarwal

SUBMITTED BY: Divya Singh (JIML-10-044) Ashutosh k. Srivastava (JIML-10-032)

ACKNOWLEDGEMNT
Perseverance Inspiration and motivation have always played a key role in the success of any venture. So hereby, it is our pleasure to record thanks and gratitude to the people involved. Firstly, we thank DR. Reena Agarwal for her continuous support in the project. Dr. Reena Agarwal was always there to listen and to give advice. She is responsible for involving us in the project on Microfinance in India. Without her encouragement and constant guidance we could not able to finish the project. She was always there to meet and talk about any query. We would also like to thank to Mr. Manish Sharma, Regional Manager,SKS Microfinance, Lucknow for enhancing our understanding of the project and enabling us to appreciate finer nuances of the subject.

Ashutosh k.Srivastava Divya Singh

ABSTRACT:
Micro-Finance refers to small savings, credit and insurance services extended to socially and economically disadvantaged segments of society, for enabling them to raise their income levels and improve living standards. The main aim of Micro-Finance is too provide loan to the poor people or to below poverty line, who are not able borrow from other sources and to make their living standard better. Micro- finance concept was first given by the Nobel laureate Prof. Mohammad Yunus in 1976 and started Grameen Bank in that year and from then many countries has followed Grameen Bank Model. It is not possible to cover each and every aspect of Micro Finance in this short duration of time. But We have tried to cover main and the basics of Micro Finance. In this report We have tried to cover each and every important part related to the Micro Finance Sector i.e. SHGs and how they formed, role of Micro Finance in the current economy, study about their interest rates, role of women in the economy, how the product is design, talking with Regional Manager, SKS Microfinance and understand the Business Model of SKS Microfinance, and many important things related to Micro Finance. During the project, we understood many areas of Micro Finance. Like how a company decides their interest rate, practically how SHGs formed, how the excess of government intervention can create disaster for the MFIs, how a Micro loan can change the life of the individuals.

INTRODUCTION TO MICROFINANCE
Micro-finance refers to small savings, credit and insurance services extended to socially and economically disadvantaged segments of society, for enabling them to raise their income levels and improve living standards. Indias population is more than 1000 million, and its the second largest in term of population after China. India's GDP ranks among the top 15 economies of the world. However, around 300 million people or about 80 million households, are living below the poverty line, i.e. less than $2 per day according to the World Bank and the poorest are which earns $1 per day . It is further estimated that of these households, only about 20% have access to credit from the formal sector. Out of these 80 million house hold, 80% takes credit from the informal sources i.e. local Zamidars, Chit Funds etc. With about 80 million households below poverty line and 80% out of this is access from informal sector, so its obvious to solve this problem and this gave birth to Micro Finance Institutions (MFIs). MFIs include nongovernmental organizations (NGOs), credit unions, non-bank financial intermediaries, and even a few commercial banks. It is firstly (and this is essential) a tool in the fight against poverty. It is not for poor people in general but for poor people who are considered to be economically active, in other words, those who carry out activities which generate revenues which in turn allow them to cover their needs and those of their families, even if these revenues are low and precarious. Microfinance offers to help them get started by giving them access to financial services from which they are generally excluded (including savings and credit facilities, insurance and fund transfers), and in ways that are suited to their economic and management skills. Ultimately, the goal of microfinance is to give low income people an opportunity to become self-sufficient by providing a means of saving money, borrowing money and insurance.

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

Legal and Regulatory Framework for the Microfinance Institutions in India:

1. SOCIETIES REGISTRATION ACT, 1860: NGOs are mostly registered under the Societies Registration Act, 1860. Since these entities were established as voluntary, not-for-profit development organizations, their microfinance activities were also established under the same legal umbrella. This act is applicable to the 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: 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 .

WORKING MODELS FOR MICROFINANCE

1. Self help group 2. Joint liability group 1. Self help group A Self-Help Group (SHG) is a registered or unregistered group of micro entrepreneurs having homogenous social and economic background voluntarily, coming together to save small amounts regularly, to mutually agree to contribute to a common fund and to meet their emergency needs on mutual help basis: In short, SHG is a small group of rural poor, who have voluntarily come forward to form a group for improvement of the social and economic status of the members. Members of SHG agree to save regularly and contribute to a common fund. The members agree to use this common fund and such other funds (like grants and loans from banks), which they may receive as a group, to give small loans to needy members as per the decision of the group. The group members use wisdom and peer pressure use of credit and timely repayment thereof. In fact, peer pressure has been recognized as an effective substitute for collaterals. Need of SHG: The rural poor are incapacitated due to various reasons, such as; most of them are socially backward, illiterate, with low motivation and poor economic base. Individually, a poor is not only weak in socioeconomic term but also lacks access to the knowledge and information, which are the most important components of todays development process. However, in a group, they are empowered to overcome many of these weaknesses. Hence, there are needs for SHG, which in specific terms are as under: To mobilize the resources of the individual members for their collective economic development.

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

To build up teamwork. To develop leadership qualities. Structure of SHG: Size of SHG : The ideal size of an SHG is 10 to 20 members. The disadvantage of having high number is that, members cannot actively participate. Also, legally it is required that an informal group should not be of more than 20 people. The group need not be registered. Condition required for membership for SHG: 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 SHG 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). 2. Joint Liability Group Joint Liability Group (JLG) is a group of individuals coming together to borrow from the financial institution. They share responsibility and stand as guarantee for each other. The individual wanting loans will have to form into a group where each member will be providing cross guarantee for each other. Working of joint liability group: 1. Joint Liability Group will approach to the NGO for the requirement of the credit and loan to improve their lives and for the technical support. 2. The NGO have tie up with the commercial banks and any other financial institution they will ask them for the amount to give them so that they can provide it to the joint liability group. 3. The Commercial bank will provide the technical support to the NGO and same they will provide it to the Joint Liability Group. 4. Then joint liability group will provide there credits and savings to the NGO and commercial banks

JLG features: JLG haves 30-35 members group. The group should be either all male or female only in exception cases can there be a mixed group. Members within a group should have similar turnover/profit and group should be economically homogeneous. The group member should be well known to each other. The group member should have their own business. The groups have shop/ business in the same locality. Lending may start from group size of not less than three members.

Difference between SHGs and JLGs SHGs (Self Help Groups) JLGs (JLG Groups) Minimum 20 members and Minimum 10 members and maximum 50. maximum 20. There is no necessary of For SHGs meeting is compulsory meeting for compulsory. JLGs. For SHGs the bank loan For JLGs, they get the loan is available. only from MFIs. SHG gets the benefit of the There is no benefit of any entire government scheme, government schemes for which is viable for them. JLGs.

ROLE OF NABARD
How NABARD helps MFIs in augmenting? NABARD gives loans to the MFIs after analyzing there rating and balance sheet. Conduct the workshop where the executive of the NABARD meet the executive and employees of different MFIs and bring them together on the same podium. NABARD gives the refinance to the MFIs also. Credit institutions as a Political tool: Debt relief in India :Rural financial institutions that are associated with governments often become the target of politicians. Indian Government appointed Agricultural Credit Review Committee in 1989. During the election years, and even at other times, there is a considerable propaganda from political platforms for postponement of loan recovery or pressure on the credit institutions to grant extension or waive of the loans. The willful defaulters are, in general, socially and politically important people who example others are likely to follow. The waiver of farm loans by the government of India has resulted in increased defaulters. Paying back the loan is a cultural concept. People borrowing money should feel the strong moral urge to pay the loan back. Loan waivers instead make them feel that if the things go really, really bad, government will step in and cancel the interest payable and even principle also. This will increase the defaulters list because even the decent borrowers default on their loan. Microfinance in India is also affected by political intervention. For example: around the year 1995, at the behest of Mr. Devilal the government of India waived the repayment of agriculture loans, in which the outstanding debit amount was less than Rs 10,000 per loan account.

It was noticed in the RBI inspection of some of the District Central Co0perative Banks (DCCBs) during the latter years that hundreds in thousands of defaulters with outstanding Dr Balance in excess of Rs 10,000 were also accommodated by some accounting jugglery. Be whatever it may, such declaration from the government obviously prompts the emergence of willful defaulters.Such a culture will seriously impact the MFIs operating in the rural areas. How MFIs manage their repayment and risk management? 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. Major Risks to Microfinance Institutions: Financial Risks Credit risk Transaction risk Portfolio risk Liquidity risk Market risk Interest rate risk Foreign exchange risk Investment portfolio risk Operational Risks Transaction risk Human resources risk Information & technology Risk Fraud (Integrity) Risk Legal & Compliance Risk Strategic Risk Governance Risk Ineffective oversight Poor governance structure Reputation Risk External Business Risks Event risk

Why micro finance provides loan to the women only? A majority of microfinance programs generally target womenoften more financially responsible at repaying than menas clients, providing them with direct control over resources. Why MFIs typically targeted women. These factors included: Repayment rates are higher than men, so lending to women is a better Investment. Women are on average poorer than men, so focusing on women can help achieve poverty targets. Womens activities contribute to a communitys economic growth, so lending to women is more efficient. The members in a group are selected so as to be in the same age group and residing in the same locality being friends but not from family. In case of problems in recovery from even one of the members, the system of joint liability ensures recovery of the dues from all the members within a group. Women are better borrowers because they repay their loans more faithfully than men repay and tend to spend money on improving the standard of living of their family. It has been proved that women are those who are the most able to manage the money of the household. Experience has shown that women are a good credit risk, and that women invest their income surround the well being of their families. Women have proven to be the best poverty fighters. Experience and studies have shown that they use the profits from their businesses to send their children to school, improve their families living conditions and nutrition, and expand their businesses. By providing access to financial services only through women making women responsible for loans, ensuring repayment through women, maintaining savings accounts for women, providing insurance coverage through womenmicrofinance programs send a strong message to households as well as to communities.

Why Microcredit Rates are so high? The reason is that the administrative costs are inevitably higher for tiny microlending than for normal bank lending. Lending out a million dollars in 100,000 loans of $100 each will obviously require a lot more in staff salaries than making a single loan for the total amount. As a result, interest rates in sustainable microfinance institutions (MFIs) are substantially higher than the rates charged on normal bank loans. Inflation adds to the cost of microfinance funds by eroding micro lenders' equity. Thus, higher inflation rates contribute to higher nominal microcredit interest rates through their effect on the real value of equity. Most of the Micro lenders face two kinds of operating costs: personnel and administrative. Because micro lending is still a labor-intensive operation, personnel costs are high. Administrative costs consist mainly of rent, utility charges, transport, office supplies, and depreciation of fixed assets. Making and recovering small loans is costly on a per unit basis. Often loan recovery is executed by staffs who visit clients, increasing costs in time taken and transportation used. Poor physical infrastructureinadequate road networks, transportation, and telecommunication systems in many countries in which micro lenders operate also increases administrative costs and adds significantly to the cost of microfinance operations.

SWOT Analysis of micro finance Strength : Helped in reducing the poverty: The main aim of Micro Finance is to provide the loan to the individuals who are below the poverty line and cannot able to access from the commercial banks. As we know that Indian, more than 350 million people in India are below the poverty and for them the Micro Finance is more than the life. By providing small loans to this people Micro finance helps in reducing the poverty. Huge networking available: For MFIs and for borrower, both the huge network is there. In India there are many more than 350 million who are below the poverty line, so for MFIs there is a huge demand and network of people. And for borrower there are many small and medium size MFIs are available in even remote areas. Weakness : Not properly regulated: In India the Rules and Regulation of Micro Finance Institutions are not regulated properly. In the absent of the rules and regulation there would be high case of credit risk and defaults. In the shed of the proper rules and regulation the Micro finance can function properly and efficiently. High number of people access to informal sources: According to the World Bank report 80% of the Indian poor cant access to formal source and therefore they depend on the informal sources for their borrowing and that informal charges 40 to 120% p.a. Concentrating on few people only: India is considered as the second fastest developing country after China, with GDP over 8.5% from the past 5 years. But this all interesting figures are just because of few people. Indias 70% of the population lives in rural area, and that portion is not fully touched.

Opportunity: Huge demand and supply gap: There is a huge demand and supply gap among the borrowers and issuers. In India around 350 million of the people are poor and only few MFIs there to serving them. There is huge opportunity for the MFIs to serve the poor people and increase their living standard. The annual demand of Micro loans is nearly Rs 60,000 crore and only 5456 crore are disbursed to the borrower.( April 09) Employment Opportunity: Micro Finance helps the poor people by not only providing them with loan but also helps them in their business, educate them and their children etc. So in this Micro Finance helping in increase the employment opportunity for them and for the society. Huge Untapped Market: Indias total population is more than 1000 million and out of 350 million is living below poverty line. So there is a huge opportunity for the MFIs to meet the demand of that unserved customers and Micro Finance should not leave any stones unturned to grab the untapped market
Opportunity for Pvt. Banks: Many Pvt. Banks are shying away from to serve the people are unable to access big loans, because of the high intervention of the Govt. but the door open for the Pvt. Players to get entry and with flexible rules Pvt. Banks are attracting towards this segment.

Threat: High Competition: This is a serious threat for the Micro Finance industry, because as the more players will come in the market, their competition will rise , and we know that the MFIs has the high transaction cost and after entrant of the new players there transaction cost will rise further, so this would be serious threat.

Neophyte Industry: Basically Micro Finance is not a new concept in India, but that was all by informal sources. But the formal source of finance through Micro Finance is novice, and the rules are also not properly placed for it. Over involvement of Govt.: This is the biggest that threat that many MFIs are facing. Because the excess of anything is injurious, so in the same way the excess involvement of Govt. is a serious threat for the MFIs. Excess involvement definition is like waive of loans, make new rules for their personal benefit etc

SKS Microfinance
Swayam Krishi Sangam (SKS) employs the Grameen bank lending methodology. SKS is a young MFI, which recently transformed into an NBFC and was established as an NGO in 1997 by Vikram Akula, a social entrepreneur and graduate of both Yale & Tufts Universities.72 The mission of SKS is, To empower the poorest of the poor to become economically self-reliant by providing financial services to poor women, through groups at the village level, in a self sufficient manner. Its goal going forward is to raise money in order to scale up and reach 15 million customers by 2012. Since its founding, SKS has delivered over US $ 1.3 Billion (6,640 Crore) and has maintained loans outstanding of US$ 451 Million (Rs 2,284 Crore) in loans to 3,953,324 women members in poor regions of India. Thus we are interested in how it has fared as an NGO and what has driven it to transform. It then completes the picture of the various approaches to becoming an NBFC that an MFI can take and therefore, allows us to see a wider and richer array of benefits and costs. Sources of Capital SKS transformed from and NGO into an NBFC in January 2005 order to improve financial sustainability and access commercial funds in order to scale up outreach to 1,000,000 clients by 2010. SKS cited the benefits that it now enjoys as an NBFC as: Greater access to funds as commercial lenders have greater comfort lending to a regulated company with transparent ownership. A diverse funding source because as an NBFC, SKS can raise equity and offer financial returns, enabling it to access commercial investors and international capital markets.

 Greater Outreach Potential due to increased access to funds. SKS has historically sourced most of its capital from donors and loans. In 2008, SKS indicated that 40% of the company is owned by its clients with 15% of it owned by employees and the rest by a group of institutional and individual investors. Organization & Management Analysis Strategic Vision The strategy of SKS to achieve its mission is to help poor people access small, low interest loans during times of crisis, so that they can avoid falling into debt traps. SKS endeavors to offer the poor alternatives from Banks that require collateral and bureaucratic procedures as well as moneylenders that charge exorbitant interest rates. The company does so by delivering collateral-free microfinance in the form of small loans and savings facilities to the doorstep of the poor. SKS seems to have a strong strategic mission but there is some uncertainty about its ability to balance that mission while attempting to transform into a more financially sustainable and commercially oriented institution. The rapid growth of the organization shows its commitment to outreach and scale in the service of the mandate of microfinance. Our main concern surrounds its ability to balance its ambitious mission to serve the poorest of the poor in a financially viable manner. Management & Governance SKS has a board of directors composed of seven members about which not much was said in the 2008 annual report. Thus, the diversity and strength of SKS board is somewhat unclear. However, the members of SKS Foundation, its fundraising arm, are a diverse group of professionals and academics from India and the U.S. SKS management also appears to be quite strong based simply upon ranges of experience in business and development and education

Transparency The transparency of SKS seems rather good in that its financial statements are readily available and up to date, however not all information was outlined as clearly as that of BASIX or in some instances SHARE. Information detailing governance, human resource management, and poverty impact analysis as well as poverty outreach strategy was hard to extract and not readily available. Again, this may simply be a factor of the size of the company and its length of time in operation. Loan Methodology &Village selection Before entering a village, SKS staff members conduct a comprehensive survey to evaluate the local conditions and potential for operations. Some of the key factors include total population, poverty level, road accessibility, political stability and safety. After a village has been selected, SKS conducts a Projection Meeting with the entire village to introduce SKS, its mission, methodology and services. After the projection meeting, SKS holds a Mini-Projection Meeting to further explain SKS to interested parties and appeal directly to those who may not have attended the meeting because of religious, class, caste or gender barriers. Upon completion of the miniprojection meeting, Sangam (Center) Formation begins. Sangam (centre) formation Before entering a village, SKS staff members conduct a comprehensive survey to evaluate the local conditions and potential for operations. Some of the key factors include total population, poverty level, road accessibility, political stability and safety. After a village has been selected, SKS conducts a Projection Meeting with the entire village to introduce SKS, its mission, methodology and services. After the projection meeting, SKS holds a MiniProjection Meeting to further explain SKS to interested parties and appeal directly to those who may not have attended the meeting because of religious, class, caste or gender barriers. Upon completion of the miniprojection meeting, Sangam (Center) Formation begins.

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

MEETING WITH REGIONAL MANAGER,SKS MICROFINANCE,LUCKNOWDuring project We met Mr. Manish Sharma,Regional Manager,SKS Microfinance,Gomtinagar,Lucknow.Our meeting with Mr. Sharma was very interactive.He told us following facts about microfinance specially SKS Microfinance In SKS Microfinance, financing is based on JLG(Joint liability group). Product provided by us is Microcredit, Microinsurance,Remittance facilities etc. In SKS Microfinance we select group of 30-35 people and trained them for 2-3 days (financial literacy). We give small task to group just to check each member s trust in group because it may be possible that a particular member in a group is defaulter in nature.So in this type of financing TRUST IN GROUP is important things.We check trust of member through SOCIAL BINDING.On 4th day,an employee from our company goes to check the member who pass or fail in group on the basis of task given and by checking trust of members.Thus final group is formed. We prefer women(95% women) for the group because we feel that women are more honest,hardworking and responsible than men,manage money effectively and there is also no ego problem in women. We provide loan only for income generating activities not for other purpodse. We take signature of member not thumb print so in case of illiterate woman we take signature of her husband for agreement. Provide loan to each individual in a group. Min 20 and Max 50 member can be in group. Give max loan amount to each individual in a group is Rs. 50000 and min amount is Rs. 1000.

Interest rate charged by SKS Microfinance-24.55% which is fixed,not differ to individual to individual.

We charge interest rate only on remaining loan amount after paying each instalment of loan. EX- Suppose if loan amount =Rs.1000 and interest rate= 15% installment =Rs. 100/- weekly then interest we charge at RS.1000= Rs.150 in first week in next week we charge interest rate on Rs. 1000-100=900 so interest for second week=Rs.135.

Monitoring/Inspection- We always monitor or check activities of members in group whether member is paying installment regularly or not ,whether member used this amount in income generating activities or not untill the all loan installment is paid.

IN CASE OF DEFAULTER:We make pressure to other members of group so that defaulter pay the installment .This is called SOCIAL COLATERAL BINDING PRESSURE. So default ratio is low (1-2 % default case) that is our efficiency is almost 99% for recovery of loan. Loss in case of default is managed by high interest rate. We take high interest rate because of inflation, high administrative cost for giving this small amount of loan. Loan is either of Rs. 1000 or Rs.1000000 cost come in the whole process is same because fixed cost for approving a loan of small or large is same.

We take fund for financing loan to clients through SIDBI,NABARD,YES BANK etc,but fund raising is also affected by recession and gov policy. We can provide 2-3 loan to a group in a year after seeing their loan paying performance that is if a group paid all its loan installment with in time then we can give further loan to a group for income generating activities. We form SANGAM CENTRE in radius of 25 km in a village.

BIBLIOGRAPHY
http://www.cgap.org/ http://www.sksindia.com/ http://www.microfinancefocus.com/ http://microfinancehub.com/