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SYBBA B Financial Management Micro finance in India

Submitted to: Ms. Nancy Shah Submitted by: Nikita Maskara (93) Palak Narang (110)

Contents
Microfance :Definition and brief explanation Microfinance in India Microfinance summit in india-2010 Twin steps towards regulation History of modern micro finance Objectives of micro finance Challenges faced Benefits of micro finance Micro finance institutions Cost, interest rates and sustainability Problems caused Reference with RBIs Top 50 micro finance institutions

What is Microfinance?
Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services. Microfinance is the supply of loans, savings, and other basic financial services to the poor." More broadly, it is a movement whose object is "a world in which as many poor and nearpoor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers."[1]Those who promote microfinance generally believe that such access will help poor people out of poverty. Microfinance is a broad category of services, which include microcredit. Microcredit can be defined as the provision of credit services to poor clients. Although microcredit by definition can achieve only a small portion of the goals of microfinance, conflation of the two terms is endemic in public discourse. In other words, critics attack microcredit while referring to it indiscriminately as either 'microcredit' or 'microfinance'. Due to the broad range of microfinance services, it is difficult to assess impact, and no studies to date have done so. As these financial services usually involve small amounts of money - small loans, small savings, etc. - the term "microfinance" helps to differentiate these services from those which formal banks provide Why are they small? Someone who doesn't have a lot of money isn't likely to want or be able to take out a $50,000 loan, or be able to open a savings account with an opening balance of $1,000. It's easy to imagine poor people don't need financial services, but when you think about it they are using these services already, although they might look a little different. "Poor people save all the time, although mostly in informal ways. They invest in assets such as gold, jewelry, domestic animals, building materials, and things that can be easily exchanged for cash. They may set aside corn from their harvest to sell at a later date. They bury cash in the garden or stash it under the mattress. They participate in informal savings groups where everyone contributes a small amount of cash each day, week, or month, and is successively awarded the pot on a rotating basis. Some of these groups allow members to borrow from the pot as well. The poor also give their money to neighbors to hold or pay local cash collectors to keep it safe. "However widely used, informal savings mechanisms have serious limitations. It is not possible, for example, to cut a leg off a goat when the family suddenly needs a small amount of cash. In-kind savings are subject to fluctuations in commodity prices, destruction by insects, fire, thieves, or illness (in the case of livestock). Informal rotating savings groups tend to be small and rotate limited amounts of money. Moreover, these groups often require rigid amounts of money at set intervals and do not react to changes in their members' ability to save. Perhaps most importantly, the poor are more likely to lose their money through fraud or mismanagement in informal savings arrangements than are depositors in formal financial institutions."

"The poor rarely access services through the formal financial sector. They address their need for financial services through a variety of financial relationships, mostly informal."

Microfinance in India
The microfinance industry in India is growing by the day. According to one recent study by Intellecap, the 60 largest microfinance institutions in India have 10 million clients. That's 10 million of the working poor who have been given small loans that allow them to pull themselves and their family out of poverty. Microfinance loans are aimed at empowering the impoverished, mostly women, to start their own businesses and to grow their money so they can achieve long-term financial independence. That's why this concept carries many advantages over typical philanthropic endeavors.

Microfinance India Summit 2010

Over the last seven years, the Microfinance India Summit, organized by ACCESS Development Services, has established itself as an international conference dedicated to Indian microfinance. It has become the single most important platform for sharing the Indian experience, unique as it is, with a global audience. At the same time, it also provides an avenue to learn about international trends and best practices for adaptation by the Indian community of practitioners. Policy makers, practitioners, promoters, academics, researchers and thought leaders share their experiences on various panels, and about 1000 delegates from both within and outside the country participate in the Summit. It bridges the unnecessary hiatus between models and methodologies and helps to build consensus on the critical challenges and issues. In the past, the Summit themes have helped in focusing on key issues including "Inclusion, Innovation and Impact" (2005), "Urban Microfinance" (2006), "Formal Financial Institutions - the challenges of depth and breadth" (2007), "The Poor First" (2008) and "Doing good and doing well- The need for balance" (2009) The microfinance India Summit 2010 was held between November 15-16, 2010 at Hotel Ashok, New Delhi. The over-arching theme for the Summit was "Mission of Microfinance Need to Reflect and Reaffirm". Resonating the current situation in the Indian microfinance sector, the Summit sessions focused on current trends and issues relating to sustainability, transparency, social performance, commercialization of the sector, client protection, among others. The highlights of the Summit are encapsulated in the daily newsletters released during the Summit. The full report on the Summit 2010 will be uploaded shortly. Day 3 (November 17, 2010) was organized as sponsored Thematic Round Tables held at the India Habitat Center, New Delhi. The Round Tables have been designed to enable interested organizations / institutions to allow for more insightful discussions on a current issue / theme, present finding of recent research, share innovative ideas or hold consultative workshops in a structured manner with a selected small audience.

Microfinance in India: Twin Steps towards Self-Regulation By Vijay Mahajan and P N Vasudevan
Microfinance Focus , Jan 10, 2010 : The past few years have seen the entire microfinance sector grow exponentially. As with any other boom, suspicion always exists on whether a bust is just around the corner. This is especially true in the current international setting; with a major financial bust that humbled Alan Greenspan to admit he was in a state of shocked disbelief. In hindsight, it might seem obvious that the years of heady growth directly resulted in the sub-prime crisis and credit crunch. This heightens the sense of unease over the rapid growth of the microfinance industry and one is often seized of whether we are sitting on a bubble waiting to burst. Daniel Rozas piece in an edition of Microfinance Focus titled Is There a Microfinance Bubble in South India? highlighted this point and indicated that the microfinance industry in India; especially Andhra Pradesh; could be on the verge of a bubble. Microfinance Institutions Network MFIN, the newly created association of NBFC MFIs, welcomes this open discussion on the topic particularly so, since it has been seized with this issue of potential over-lending to borrowers. As Daniel mentioned, the quest for rapid growth could lead a company or industry to not realize the bubble they have been building up during this growth phase. This term encapsulates the crux of any bubble the divergence of asset valuation with its true value. In the case of microfinance, a bubble will be created if a significant number of members are funded beyond their repayment capability. The challenge is therefore to limit the total loan exposure to a member and therein lies the unasked question in Daniels piece. Instead of focusing only on the number of people serviced by microfinance, one should ask if the credit exposure of a large section of these people is beyond their repayment capability. Couple of analogies will help highlight the difference in the approach: 1. The sub-prime crisis was caused by combination of peoples inability to repay their loans and the over-valuation of the underlying asset the debtors home. It would be wrong to presume that simply because 100% of the market was served by mortgage loans, a bubble was created. If every debtor was given a mortgage loan commensurate to her repayment capacity as well as home value, we would have 100% of the customers serviced without any bubble. 2. Consider the rice/wheat market in India. Almost every household purchases these staple items; but it can hardly be said that a bubble exists in the rice/wheat markets. In fact, a large section of the population does not have sufficient grains. 3. Alpha & MFIN initiatives 4. This year, around 30 leading NBFC-MFIs that accounts for around 85% of the Indian market have come together to form Alpha Micro Finance Consultants P Ltd. Alpha will help get the credit bureau services made available to the MFIs in the country. 5. As a first step, Alpha has initiated discussions with a couple of Credit Information Bureaus to establish bureau services for all member-MFIs. This will help maintain a common database of borrowers; which will improve the ability of an MFI to evaluate a borrowers credit-worthiness before disbursing the loan to her. Alpha intends to engage 2 bureaus; including an investment in one of them as a mark of its commitment. To bolster the rollout of this initiative, Alpha has established a

partnership with the Omidyar Network and the IFC. IFC will provide technical support to Alpha as well as member-MFIs in getting themselves technically ready to be bureau ready so that they could use this data base to get a full idea of a clients total indebtedness and credit behavior before taking a call to lend further. 6. Of course, Alpha recognizes that a credit bureau is not a solution in itself. After all the sub-prime crisis in the USA was not due to lack of data . To optimize the benefit for the industry through this engagement with credit bureaus, the NBFC-MFIs have come together to create an association, Micro Finance Institutions Network (MFIN). 7. MFIN has formulated a Code of Conduct; which will require member-MFIs to adopt certain processes and be subject to certain limitations that will limit over-lending to a borrower. This Code of Conduct, in tandem with the enrollment to the Credit Bureaus, will form a strong industry-initiative to pro-actively restrict over lending and associated pains In addition, Alpha has also had preliminary consultations with the Unique Identity Development Authority of India (UIDAI). Alpha believes it could provide a valuable service to the nation by serving as a channel for verification and enrollment of millions of lower-income household members in the UIDAI database. 8. It is expected that such an exercise will also prove beneficial to Alpha since MFIs will be able to identify each of their members individually with their unique ID. This ID will empower MFIs to be completely certain of any borrowers prior exposure to other MFIs. 9. We believe that these measures will enable the microfinance industry to responsibly serve the microfinance needs of the Indian market; without creating a bubble. Apart from the benefit to clients in terms of sustained availability of micro credit and for MFIs in terms of self-regulation and sustainability of growth, on implementation of these initiatives, a goldmine of information would be available for research and analysis; enabling independent experts to provide a more comprehensive evaluation of the industry including whether a bubble is around the corner! 10. While there is no concrete evidence of a bubble as yet, a bubble in the near future cannot be completely ruled out. In particular, Alpha acknowledges that unbridled or uncontrolled lending combined with high growth rates could potentially cause a bubble. And this is exactly where Alpha & MFIN have taken significant measures well in advance of any possible bubble creation and believe that Indian MFIs are poised to avoid this scenario by adopting prudential measures as mentioned in this article. And if MFIs in India can ensure sustained growth through a strong self-regulated mechanism to ensure that a bubble does not come in the way of servicing the millions of customers who need microcredit, we believe that credit can definitely be given to the MFIs for learning from others mistakes!

The History of Modern Microfinance Percentage of Population living on less than $1 a day Credit unions and lending cooperatives have been around hundreds of years. However, the pioneering of modern microfinance is often credited to Dr. Mohammad Yunus, who began experimenting with lending to poor women in the village of Jobra, Bangladesh during his tenure as a professor of economics at Chittagong University in the 1970s. He would go on to found Grameen Bank in 1983 and win the Nobel Peace Price in 2006. (

Since then, innovation in microfinance has continued and providers of financial services to the poor continue to evolve. Today, the world bank estimates that about 160 million people in developing countries are served by microfinance.

Objectives of Micro finance

Traditionally, when a person wants to start a business venture, they go to a bank for a loan. But what should a budding entrepreneur do if he is too poor to obtain financing to start a profitable business? The answer lies in a relatively new branch of financial services called microfinance. Its purpose is to provide basic financial services such as loans, savings and insurance to underprivileged people. A microfinance institution (MFI) is simply one that offers such services to the poor; according to the Consultative Group to Assist the Poor (CGAP), it can be a credit union, commercial bank, financial non-governmental organization, or a credit cooperative. Following is a list of the main purposes of microfinance. Provide Access to Funds Typically, the poor acquire financial services like loans through informal relationships. These loans, however, come at a high cost per dollar loaned and can be unreliable. Furthermore, banks have not traditionally viewed poor people as viable clients and often will reject them due to unstable credit or employment history and lack of collateral. MFIs dismiss such requirements and provide small loans at high interest rates, thus providing MFIs the funds they need to continue operation. Encourage Entrepreneurship and Self-Sufficiency Underprivileged people may have potentially profitable business ideas, but they cannot put them into action because they lack sufficient capital for start-up costs. Microcredit loans give clients just enough money to get their idea off the ground so they can begin turning a profit. They can then pay off their micro-loan and continue to gain income from their venture indefinitely. Manage Risk Microcredit can give impoverished people enough financial stability to cross from simply surviving to accruing savings. This gives them protection from sudden financial problems that could have been devastating. Savings also allow for educational investment, improved nutrition, better living conditions and reduced illness. Microinsurance provides people the ability to pay for health care when needed, so they can receive treatment for health conditions before they become grave and more costly to treat. Empower Women Women make up a large proportion of microfinance beneficiaries. Traditionally, women (especially those in underdeveloped countries) have been unable to readily participate in economic activity. Microfinance provides women with the financial backing they need to start business ventures and actively participate in the economy. It gives them confidence, improves their status and makes them more active in decision-making, thus encouraging

gender equality. According to CGAP, long-standing MFIs even report a decline in violence towards women since the inception of microfinance. Community-Wide Benefits Generally speaking, microfinance institutions seek to reduce poverty worldwide. As they obtain funds and services from MFIs, recipients gain enormous financial benefits which trickle down to others in their families and communities. New business ventures can provide jobs, thereby increasing income among community members and improving their overall well-being. Microfinance services gives hope to people who previously had little or no opportunity to be self-sufficient.

Challenges faced
Traditionally, banks have not provided financial services, such as loans, to clients with little or no cash income. Banks incur substantial costs to manage a client account, regardless of how small the sums of money involved. For example, although the total gross revenue from delivering one hundred loans worth $1,000 each will not differ greatly from the revenue that results from delivering one loan of $100,000, it takes nearly a hundred times as much work and cost to manage a hundred loans as it does to manage one. The fixed cost of processing loans of any size is considerable as assessment of potential borrowers, their repayment prospects and security; administration of outstanding loans, collecting from delinquent borrowers, etc., has to be done in all cases. There is a break-even point in providing loans or deposits below which banks lose money on each transaction they make. Poor people usually fall below that breakeven point. A similar equation resists efforts to deliver other financial services to poor people. In addition, most poor people have few assets that can be secured by a bank as collateral. As documented extensively by Hernando de Soto and others, even if they happen to own land in the developing world, they may not have effective title to it.This means that the bank will have little recourse against defaulting borrowers. Seen from a broader perspective, the development of a healthy national financial system has long been viewed as a catalyst for the broader goal of national economic development Because of these difficulties, when poor people borrow they often rely on relatives or a local moneylender, whose interest rates can be very high.. Moneylenders usually charge higher rates to poorer borrowers than to less poor ones. While moneylenders are often demonized and accused of usury, their services are convenient and fast, and they can be very flexible when borrowers run into problems. Hopes of quickly putting them out of business have proven unrealistic, even in places where microfinance institutions are active. Over the past centuries practical visionaries, from the Franciscan monks who founded the community-oriented pawnshops of the 15th century, to the founders of the European credit union movement in the 19th century (such as Friedrich Wilhelm Raiffeisen) and the founders of the microcredit movement in the 1970s (such as Muhammad Yunus) have tested practices and built institutions designed to bring the kinds of opportunities and risk-management tools

that financial services can provide to the doorsteps of poor people. While the success of the Grameen Bank (which now serves over 7 million poor Bangladeshi women) has inspired the world, it has proved difficult to replicate this success. In nations with lower population densities, meeting the operating costs of a retail branch by serving nearby customers has proven considerably more challenging. Hans Dieter Seibel, board member of the European Microfinance Platform, is in favour of the group model. This particular model (used by many Microfinance institutions) makes financial sense, he says, because it reduces transaction costs. Microfinance programmes also need to be based on local funds. Local Roots Although much progress has been made, the problem has not been solved yet, and the overwhelming majority of people who earn less than $1 a day, especially in the rural areas, continue to have no practical access to formal sector finance. Microfinance has been growing rapidly with $25 billion currently at work in microfinance loans. It is estimated that the industry needs $250 billion to get capital to all the poor people who need it.The industry has been growing rapidly, and concerns have arisen that the rate of capital flowing into microfinance is a potential risk unless managed well.
The benefits of Micro finance

It isn't a hand out-As mentioned earlier, microfinance isn't about just giving out money to the poor. On the contrary, these are small loans that are paid back with interest. Of course, many people are skeptical when it comes to giving the poor financial loans. However, they are surprised to learn that of the over 100 million microfinance loans that have been given out, 97% of them have been repaid. That's why you can't consider microfinance a hand out, but rather, it's a hand up. It allows the poor to receive a loan--Traditionally, the poor have been unable to receive loans. That's because they don't have anything to offer as collateral. As a result, they get stuck in a vicious cycle of poverty, living and working in poor, rural areas. Should adversity strike, they simply don't have the means to combat it. Microfinance allows the poor to get the loans they need to save, invest, and create a sustainable lifestyle of financial independence and growth. These loans are used productively by the poor to create their own businesses, grow their assets, and get out of poverty once and for all. It empowers women-Many efforts of the microfinance industry are aimed at empowering women to create their own businesses. From microfinance India to microfinance in other developing countries, small loans are given to those women who live on less than $1 per day. By giving these poor women loans, the microfinance industry not only helps them pull themselves out of poverty, but it also promotes gender equality throughout the world. It creates long-term financial independence-The most important benefit of microfinance in India is that it helps create long-term financial independence in these poverty-stricken areas. See, it's one thing to send money, clothes, and other goods to the poor. It's a great gesture, but the results of this traditional style of charity are short-lived. Microfinance loans help create sustained impact by educating recipients on how to create their own businesses and how to properly manage and grow their money. Microfinance in India and several other countries received a major boost recently thanks to Lingerie Miami. Created by Renata Black, Lingerie Miami is a philanthropic brand that raises

money for microfinance institutions through the use of fashion shows. The concept has been very successful, and it's spreading to New York and other major cities throughout the world.

Microfinance Institutions A microfinance institution (MFI) is an organization that provides microfinance services. MFIs range from small non-profit organizations to large commercial banks. "Historical context can help explain how specialized MFIs developed over the last few decades. Between the 1950s and 1970s, governments and donors focused on providing subsidized agricultural credit to small and marginal farmers, in hopes of raising productivity and incomes. During the 1980s, micro-enterprise credit concentrated on providing loans to poor women to invest in tiny businesses, enabling them to accumulate assets and raise household income and welfare. These experiments resulted in the emergence of nongovernmental organizations (NGOs) that provided financial services for the poor. In the 1990s, many of these institutions transformed themselves into formal financial institutions in order to access and on-lend client savings, thus enhancing their outreach Why don't banks serve poor people?

World population with access to Finance Formal financial institutions were not designed to help those who don't already have financial assets - they were designed to help those who do. So what do poor people do? "Credit is available from informal commercial and non-commerical money-lenders but usually at a very high cost to borrowers. Savings services are available through a variety of informal relationships like savings clubs, rotating savings and credit associations, and mutual insurance societies that have a tendency to be erratic and insecure." Some banks do provide these services, however. Grameen Bank in Bangladesh was formed out of a project providing small loans to women in the village of Jobra. Bancosol, a commercial bank in Bolivia, is also a bank which provides microfinance services for the poor of Bolivia. However, the majority of formal banks do not provide microfinance products as microfinance is an expensive enterprise - you can make a lot more money on a large loan than a small loan, and you won't make much money holding savings accounts with very little funds in them. Banks can make more money if they only provide financial services to those who already have money. Costs, Interest Rates, and Sustainability Interest Rates (They're High)

The nature of microcredit - small loans - is such that interest rates need to be high to return the cost of the loan. "There are three kinds of costs the MFI has to cover when it makes microloans. The first two, the cost of the money that it lends and the cost of loan defaults, are proportional to the amount lent. For instance, if the cost paid by the MFI for the money it lends is 10%, and it experiences defaults of 1% of the amount lent, then these two costs will total $11 for a loan of $100, and $55 for a loan of $500. An interest rate of 11% of the loan amount thus covers both these costs for either loan. "The third type of cost, transaction costs, is not proportional to the amount lent. The transaction cost of the $500 loan is not much different from the transaction cost of the $100 loan. Both loans require roughly the same amount of staff time for meeting with the borrower to appraise the loan, processing the loan disbursement and repayments, and follow-up monitoring. Suppose that the transaction cost is $25 per loan and that the loans are for one year. To break even on the $500 loan, the MFI would need to collect interest of $50 + 5 + $25 = $80, which represents an annual interest rate of 16%. To break even on the $100 loan, the MFI would need to collect interest of $10 + 1 + $25 = $36, which is an interest rate of 36%. At first glance, a rate this high looks abusive to many people, especially when the clients are poor. But in fact, this interest rate simply reflects the basic reality that when loan sizes get very small, transaction costs loom larger because these costs can't be cut below certain minimums." Profitability and Sustainability of MFIs "Some worry that an excessive concern for profit in microfinance will lead MFIs away from poor clients to serve better-off clients who want larger loans. It is true that programs serving very poor clients are somewhat less profitable than those reaching better-off clients, but this may say more about managers' objectives than an inherent conflict between serving the very poor and profitability. MFIs serving the very poor are showing rapid financial improvement. Microfinance programs like Bangladesh Rural Advancement Committee and ASA in Bangladesh have already demonstrated that very poor clients can be reached profitably: both institutions had profits of more than 4% of assets in 2000. There are cases where microfinance cannot be made profitable, for example, where potential clients are extremely poor and risk-averse or live in remote areas with very low population density. In such settings, microfinance may require continuing subsidies. Whether microfinance is the best use of these subsidies will depend on evidence about its impact on the lives of these clients." Evidence that Microfinance Works

According to CGAP, "Comprehensive impact studies have demonstrated that:

Microfinance helps very poor households meet basic needs and protect against risks The use of financial services by low-income households is associated with improvements in household economic welfare and enterprise stability or growth;

By supporting women's economic participation, microfinance helps to empower women, thus promoting gender-equity and improving household well-being; For almost all significant impacts, the magnitude of impact is positively related to the length of time that clients have been in the program."

"Poor people, with access to savings, credit, insurance, and other financial services, are more resilient and better able to cope with the everyday crises they face. Even the most rigorous econometric studies have proven that microfinance can smooth consumption levels and significantly reduce the need to sell assets to meet basic needs. With access to microinsurance, poor people can cope with sudden increased expenses associated with death, serious illness, and loss of assets. "Access to credit allows poor people to take advantage of economic opportunities. While increased earnings are by no means automatic, clients have overwhelmingly demonstrated that reliable sources of credit provide a fundamental basis for planning and expanding business activities. Many studies show that clients who join and stay in programs have better economic conditions than non-clients, suggesting that programs contribute to these improvements. A few studies have also shown that over a long period of time many clients do actually graduate out of poverty. "By reducing vulnerability and increasing earnings and savings, financial services allow poor households to make the transformation from "every-day survival" to "planning for the future." Households are able to send more children to school for longer periods and to make greater investments in their children's education. Increased earnings from financial services lead to better nutrition and better living conditions, which translates into a lower incidence of illness. Increased earnings also mean that clients may seek out and pay for health care services when needed, rather than go without or wait until their health seriously deteriorates." "Empirical evidence shows that, among the poor, those participating in microfinance programs who had access to financial services were able to improve their well-being-both at the individual and household level-much more than those who did not have access to financial services. "Microcredit may be inappropriate where conditions pose severe challenges to loan repayment. For example, populations that are geographically dispersed or have a high incidence of disease may not be suitable microfinance clients. In these cases, grants, infrastructure improvements or education and training programs are more effective. For microcredit to be appropriate, the clients must have the capacity to repay the loan under the terms by which it is provided Microfinance Can Be a Good Tool For Empowering Women "Microfinance programs have generally targeted poor women. By providing access to financial services only through women-making women responsible for loans, ensuring repayment through women, maintaining savings accounts for women, providing insurance coverage through women-microfinance programs send a strong message to households as well as to communities. Many qualitative and quantitative studies have documented how access to financial services has improved the status of women within the family and the community. Women have

become more assertive and confident. In regions where women's mobility is strictly regulated, women have become more visible and are better able to negotiate the public sphere. Women own assets, including land and housing, and play a stronger role in decision making. In some programs that have been active over many years, there are even reports of declining levels of violence against women." Microfinance is Not a Silver Bullet "Microfinance is but one strategy battling an immense problem. "In the last two decades, substantial progress has been made in developing techniques to deliver financial services to the poor on a sustainable basis. Most donor interventions have concentrated on one of these services, microcredit. For microcredit to be appropriate however, the clients must have the capacity to repay the loan under the terms by which it is provided. Otherwise, clients may not be able to benefit from credit and risk being pushed into debt problems. This sounds obvious, but microcredit is viewed by some as "one size fits all." Instead, microcredit should be carefully evaluated against the alternatives when choosing the most appropriate intervention tool for a specific situation. "Microcredit may be inappropriate where conditions pose severe challenges to standard microcredit methodologies. Populations that are geographically dispersed or nomadic may not be suitable microfinance candidates. Microfinance may not be appropriate for populations with a high incidence of debilitating illnesses (e.g., HIV/AIDS). Dependence on a single economic activity or single agricultural crop, or reliance on barter rather than cash transactions may pose problems. The presence of hyperinflation, or absence of law and order may stress the ability of microfinance to operate. Microcredit is also much more difficult when laws and regulations create significant barriers to the sustainability of microfinance providers (for example, by mandating interest-rate caps). While microfinance can not reach all economic segments of society, it has been shown to reach segments previously un-serviced by other financial markets. - "Evidence of Microfinance's Contribution to Achieving the Millennium Development Goals",

Problems faced by micro finance

Is it possible to make money while helping people out of poverty? In the last five years or so, one business microfinance seemed to suggest that the answer was yes. Look at the numbers: from merely $12 million in 2003, the market for lending tiny amounts of money mainly to groups of women has grown to more than $7 billion now. And analysts expect this to grow to a staggering $50 billion soon. Its easy to understand why. Many people in rural India dont have access to loans from formal banks. In any case, procedures are cumbersome, paperwork intimidating. That explains why people go to moneylenders, who charge them upwards of 50% for loans. Microfinance, based on a model borrowed from Bangladesh, was supposed to change all that.

Micro-credit institutions would make small loans to groups of women at rates lower than what moneylenders charge. These would go into productive investments and defaults would be kept low because the entire community or a group of women borrowers would keep an eye on each other to make sure that the funds were used properly and repayments were on time. Today, its reckoned that womens selfhelp groups (SHGs) reach about 50 million people. Another 20 million are covered by microfinance institutions (MFIs). That leaves about 100 million people who still rely on moneylenders or relatives for loans. Thats a huge untapped market, which explains why analysts are falling over each other to talk up microfinance. A few months ago, Indias largest micro-credit company, SKS Microfinance , had a hugely successful listing. But now, the whole micro-credit story seems to be fraying at the edges. And thats even if you discount the churn at the top in SKS. Whats worrying many people is whether its possible to keep poor borrowers happy while growing profits fast enough to keep shareholders smiling as well. In June, the governments of Andhra Pradesh and Kerala asked MFIs to comply with local rules that regulate the money lending activity. A handful of MFIs are contesting this in court. And last week, Andhra Pradesh passed an ordinance to regulate MFIs, one which stops short of capping interest rates. These southern states are worried about two things: the interest rates charged by the institutions and the possibility that borrowers could be coerced by goons hired by MFIs to make repayments. Andhra Pradesh has good reasons to worry about micro lending. Numbers from the Reserve Bank of India (RBI) show that over 53% of loans there are sourced from moneylenders. Tamil Nadu follows, with moneylenders accounting for 40% of all borrowings. Moneylenders account for more than 30% of all lending in four more states: Bihar, Manipur, Punjab and Rajasthan. MFIs borrow from banks at around 12% and lend at anything between 25% and 30%. This can be hugely profitable. The return on assets a ratio used to measure profitability of financial institutions is 6.8 for SKS Microfinance; its 1.7 for HDFC Bank and 1.1 for SBI. Over the years, profits have grown at a fast clip: in the last two years, earnings per share at SKS shot up by 346% and 59% respectively; they expected to rise to 79% by March 2011.

RBI gives breather to MFIs

Asks banks to recast unsecured loans without NPA classification.
The Reserve Bank of India (RBI) has asked banks to go easy on microfinance institutions (MFIs) by relaxing certain norms regarding loan restructuring. Banks can now restructure loans extended to MFIs even if they are not fully secured. As a special case, banks need not classify such loans as non-performing assets (NPAs).

This relaxation was given considering the fact the problems afflicting MFIs were not necessarily on account of any credit weakness per se but mainly due to environmental factors, RBI said in a note. A top official of the Indian Banks Association said total lending by banks and financial institutions to MFIs was over Rs 20,000 crore. Over 85 per cent of the exposure was to sixseven large players. Banks will subject larger MFIs to greater scrutiny for books, pricing and recovery practices, said the official. The ad hoc measures required the various banks financing an MFI to come together to restructure the package. The common approach would improve information sharing and discipline in MFIs as borrowers, the official added. The restructuring will involve giving more time for repayment, a cut in interest rates, making some sacrifice on the amount due, asking MFI promoters to bring additional capital and commitment to restructure clients loans. These measures are applicable only to standard accounts. When banks restructure unsecured credit, the account is treated as an NPA for one year and requires higher provisioning. As a special case, when restructured, the unsecured loans to MFIs would be treated as standard assets. This would save banks from making provisioning for NPAs. RBI has advised banks to recycle the collections of MFIs. This translates into MFIs using the repayment amount for further lending and operational purposes. These temporary measures are applicable to MFI loans restructured till March 31, 2011. RBI said this would help ease the liquidity crunch until action was taken on the recommendations submitted by the Malegam committee. The committee was set up under Y H Malegam to study the issues specific to the MFI sector. The sector was hit hard, especially in Andhra Pradesh, after new norms regarding lending rates and collection practices were implemented. This led to shortage of funds with MFIs, in turn, affecting their borrowings from banks.

CRISIL List of Top 50 Microfinance Institutions in India by Loan Amount Outstanding for 2009 1. SKS Microfinance Ltd (SKSMPL) 2 Spandana Sphoorty Financial Ltd (SSFL) 3 Share Microfin Limited (SML) 4 Asmitha Microfin Ltd (AML) 5 Shri Kshetra Dharmasthala Rural Development Project(SKDRDP) 6 Bhartiya Samruddhi Finance Limited (BSFL) 7 Bandhan Society 8 Cashpor Micro Credit (CMC) 9 Grama Vidiyal Micro Finance Pvt Ltd (GVMFL) 10 Grameen FinancialServices Pvt Ltd (GFSPL) 11 Madura Micro Finance Ltd (MMFL)

12 BSS Microfinance Bangalore Pvt Ltd (BMPL) 13 Equitas Micro Finance India P Ltd (Equitas) 14 Bandhan Financial Services Pvt Ltd (BFSPL) 15 Sarvodaya Nano Finance Ltd (SNFL) 16 BWDA Finance Limited (BFL) 17 Ujjivan FinancialServices Pvt Ltd (UFSPL) 18 Future Financial Services ChittoorLtd (FFSL) 19 ESAF Microfinance & Investments Pvt. Ltd (EMFIL) 20 S.M.I.L.E Microfinance Limited 21 SWAWS Credit Corporation India Pvt Ltd (SCCI) 22 Sanghamithra Rural Financial Services (SRFS) 23 Saadhana Microfin 24 Gram Utthan Kendrapara, 25 Rashtriya Seva Samithi (RASS) 26 Sahara Utsarga Welfare Society (SUWS) 27 Sonata Finance Pvt Ltd (Sonata) 28 Rashtriya Gramin Vikas Nidhi 29 Arohan Financial Services Ltd (AFSL) 30 Janalakshmi Financial Services Pvt Ltd (JFSPL) 31 Annapurna Financial Services Pvt Ltd 32 Hand in Hand (HiH) 33 Payakaraopeta Womens Mutually Aided Co-operative Thrift and Credit Society (PWMACTS) 34 Aadarsha Welfare Society(AWS) 35 Adhikar 36 Village Financial Services Pvt Ltd (VFSPL) 37 Sahara Uttarayan 38 RORES Micro Entrepreneur Development Trust(RMEDT) 39 Centre for Rural Social Action (CReSA) 40 Indur Intideepam Federation Ltd (IIMF) 41 Welfare Organisation for Multipurpose Mass Awareness Network (WOMAN) 42 Pragathi Mutually Aided Cooperative Credit and Marketing Federation Ltd(PMACS) 43 Indian Association for Savings and Credit(IASC) 44 Sewa Mutually Aided Cooperative Thrift Societies Federation Ltd (Sewa) 45 Initiatives for Development Bangalore, Foundation (IDF) 46 Gandhi Smaraka Grama Seva Kendram (GSGSK) 47 Swayamshree Micro Credit Services (SMCS) 48 ASOMI 49 Janodaya Trust 50 Community Development Centre (CDC)

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