T.Y.B.B.I.

Microfinance

EXECUTIVE SUMMARY

Microfinance is yet another area where banks can play an active role.
The objective of microfinance is to deliver a wide range of financial services
like deposits, advances, insurance and other related products to people
engaged in agricultural, small enterprise and poor people in order to increase
their standard of living. Finance, which is basically an institutional/group
finance instead of lending to individual beneficiaries unlike in the case of
priority sector/rural lending, is extended to SHGs or NGOs. Moreover, there
are no subsidies or interest concessions and the basic concept in
microfinance is to give a timely finance to the needy people. Therefore,
transaction costs are cheaper and profitability is better under microfinance
when compared to the conventional rural lending. In view of these factors in
the long run, microfinance is likely to replace the conventional and
concessional rural lending. There is ample scope for private & foreign banks
to venture into this activity due to the above mention advantage. Rural India
an its economy is mainly depend on monsoons. Famine and floods both
occur at the same time in different parts of the country causing damage to
the crops. Therefore, rural insurance has to be an effective tool in hedging
these risk factors. Government, banks and insurance agencies have to
together evolve a more proactive and vibrant measures to deal with this
issue, both at micro and macro level.

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T.Y.B.B.I. Microfinance

OBJECTIVES

The objective of undertaking a project on Microfinance is to have in-

depth knowledge about the current rural development by banks and
government.

Objective behind these project are:

 To make a comprehensive study the about the microfinance.
 To know about the competition and challenges faced by the
banks in order to survive in the market.
 To know the future scope involved in Microfinance Industry.

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T.Y.B.B.I. Microfinance

INTRODUCTION

India is the largest democratic country and one of the fastest growing
economies in the world. It is the second most populous country after China,
with 1.1 billion populations in 2007.

The improving economic conditions and steady rise in Gross

Domestic Product (GDP) growth rate have put the country in the center of
focus in global business environment. With a huge population and an
increasing number of the consuming class, the Indian economy was ranked
among top 15 economies of the world. The agricultural growth coupled with
steady expansion of industry and services contributed to a high GDP growth
rate. It shows in the below:

In spite of these developments, nearly 400 million people lived on less

than $1 a day in India in 2005. According to the data available for the year
2006, more than 35% of the population in India earned about less than a
dollar a day. Nearly 70% of the total population lived in rural areas, while
about 30% lived in urban areas in 2006. According to the government
statistics, 70% of the poor (nearly 225 million) lived in the villages, with per

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T.Y.B.B.I. Microfinance

capita consumption expenditure of Rs. 356 ($8.70) a month or Rs. 11.70

($0.28) a day. The majority of rural poor were mainly involved in the
agricultural activities employed by the local landowners. The others
followed caste-oriented occupations like priests, carpenters, blacksmiths,
barbers, weavers, potters, oil-pressers, leatherworkers, sweepers, etc. Thus,
the incomes generated from such activities were far from ‘acceptable’.

The majority of the rural population was neither prosperous nor had
enough security to approach formal financial institutions for its credit needs.
It lacked access to formal financial intermediaries, including basic saving
services. This created the need for microfinance, which meant any activity
that provided financial services as credit, savings, and insurance to low
income individuals with a goal of creating social value. The social goal
included poverty alleviation and improving livelihood opportunities through
the provision of capital for micro enterprise and insurance and savings.

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T.Y.B.B.I. Microfinance

WHAT IS MICROFINANCE?

Microfinance refers to the provision of financial services to low-

income clients, including the self-employed. The term also refers to the
practice of sustain ably delivering those services.

More broadly, it refers to a movement that envisions “a world in

which as many poor and near-poor 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.”

Microfinance could be defined as the provision of a broad range of

financial services such as deposits, loans, money transfers and insurance to
the poor, low income households and micro-enterprises. Another definition
of microfinance is the small scale financial services provided to the people
who work in agriculture, fishing, herding; who operate small or micro
enterprises; who provides services; who work for wages or commission; and
other individuals or groups at the local level of developing countries, both
rural and urban. Financial services usually include credit and savings, but
there are micro-finance institutions who provide additional services also,
such as issue of cheques, drafts, guarantees etc. The Task Force constituted
by NABRD defined micro-finance as ‘provision of thrift, credit and other
financial services and products of very small amounts to the poor in rural
and semi-urban or urban areas for enabling them to raise their income levels
and in improving living standards.

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T.Y.B.B.I. Microfinance

Improving the access of these bypassed people to financial services is

one of the tools to improve their financial condition and also to enable them
to contribute optimally to the overall economic development of the
community.

The origins of institutionalizing micro-finance could be traced to the

beginning of the cooperative movement in Germany. The famed Raiffeisen
Societies were perhaps the first institutional structures which attempted to
provide loans to the peasants for developing their businesses and freeing
them from the money lenders who charged very high rates of interest. In
India, the enactment of the cooperative societies Act in 1904 was the
beginning of micro-finance. The objectives of the enactment were the same
which had led to the establishment of Raiffeisen Societies i.e. to provide
credit to the farmers and combating the problems of usury and indebtedness
to the village money lenders. The urgency to improve agriculture and
keeping in view the widespread poverty, oppression and ignorance, the state
became increasingly involved in the financial markets. On the
recommendation of the All India Rural Credit Survey Report, the State
partnership in credit cooperatives started.

Over time, the Government’s involvement in the credit cooperatives

increased and the credit cooperatives (by and large) ceased to be
autonomous people’s institutions and are now seen more as a state
instrument. The Government of India has also taken a number of steps to
improve the flow of institutional credit to the small and marginal farmers
(SMF) in particular and other rural population in general. The expansion of
the branch network of the nationalized banks, establishment of the RRBs,

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T.Y.B.B.I. Microfinance

the priority sector and other targets [agricultural loans, loans to weaker
sections etc.] for commercial banks, the Differential Rate of interest scheme,
programmes like IRDP, SGSY etc. were intended to improve the access of
the rural people to credit and to improve their incomes. However, some of
these, particularly the Differential interest rate lending the IRDP, SGSY etc.
were more in the nature of poverty alleviation schemes and not so much for
improving the access of the bypassed rural population to the financial
services.

The expansion of the network of the banking system in the rural areas
helped in bringing banking to the masses. The institutional credit which
accounted for only 7% of the borrowings of the rural households in 1951-52
increased to 61.2% in 1981, but came down to 56.6% in 1991. Tanks to the
efforts of the banking system, the agriculture credit flow during 2003-04 has
reached a massive Rs. 80000 crore. The credit flow to the agriculture sector
has been registering as decadel annual growth rate of around 14 to 15%
which means the doubling of credit flow in about every five years or so.
Inspite of these massive gains, it is believed that the formal sector only
accounts for the tip of the iceberg of rural finance. A large part of the rural
financial flows is transacted in the informal sector and remains unreported.

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T.Y.B.B.I. Microfinance

DEFINITION OF MICROFINANCE

Microfinance refers to the provision of financial services to poor or

low-income clients, including consumers and the self-employed. The term
also refers to the practice of Sustainability delivering those services.

More broadly, it refers to a movement that envisions “a world in

which as many poor and near-poor 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.

The Task Force on supportive Policy and Regulatory Framework for

Microfinance created by NABARD suggests a working definition of
microfinance as “provision of thrift, credit and other financial services and
products of very small amounts to the poor in rural, semi-urban or areas for
enabling them to raise their income levels and improve living standards”.

As per one of the working groups of RBI “Microfinance refers to

small saving, credit and insurance services extended to socially and
economical disadvantaged segments of society. In much more broader
context it include capacity building, training, marketing of products,
establishing forward and backward linkage to micro-enterprise”

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T.Y.B.B.I. Microfinance

Microcredit

It is generally observed that that poor people do not have access to

bank loans. Private money lenders charge very high interest rates. This
makes it difficult for poor people to access funds for starting small income
generation activities like sewing, buying buffalo, opening a tea stall or some
other small shop. The microcredit summit, held in Washington DC (1997)
defines Microcredit as, “extending small loans to poor people for self-
employment project that generate income, allowing than to care for
themselves and their families.” (Swaminathan, M., 2007) Microcredit caters
the need of people for small loans. Microfinance includes support services
along with the loan components. In Microcredit, more emphasis is placed on
providing loans.
Microfinance, thereby, open up channels for thrift, market assistance,
technical assistance, capacity building, social and cultural programmes.
Thus, microfinance has an element of ‘Credit plus’ while microcredit is
‘only credit’.

NEED FOR EMERGENCE OF MICROFINANCE

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T.Y.B.B.I. Microfinance

Most of the countries in the world are either in the category of

developing or underdeveloped economy. When compared with developed
countries, developing and underdeveloped countries have more population
and less resources.

In any economy, most of the day-to-day activities require money.

Money is mandatory for education, wedding, health, etc. The financial needs
of any human being can be divided into lifecycle, needs, personal
emergencies, disasters, invest opportunities, etc.

Agriculture is the main occupation for those in rural areas. The

farmers have to invest money to buy seeds, fertilizers, land and various
requirements for agriculture. But because of their financial crisis, they find it
difficult to buy them. So they usually depend on moneylenders and other
informal financial sources. The formal financial institutions do not much
interest in lending to the rural poor. There are millions of them who are
presently suffering from the high interest rates and debt overhang in the
developing and underdeveloped countries.

There are two basic strategies that can help the poor to meet their
needs. The strategy of providing money before the need arises is known as
‘Saving Up’. When a need arises, to fulfill the need, people borrow money.
Later they save money to repay the loan. It is known as ‘Saving Down’.

The above fact has given rise to microfinance. This is purely based on
the fact that poor can save, borrow or lend and even repay their debts. These

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T.Y.B.B.I. Microfinance

findings have led to other great inventions like liquid-yields options. The
fundamentals financial services, like savings, credit and insurance provide
an opportunity to people to borrow, save, invest and protect against risks.
Poor people require basic insurance option, saving services and realistic
remittance systems to manage their assets and generate income. But with
little income, they are unable to manage their lives and, moreover, they are
not able to borrow money from banks. Hence, they tend to rely on informal
financial institutions, like village moneylenders, pawn-brokers, Rotating
Savings and Credit Associations (ROCSAs), Accumulating Savings and
Credit Associations (ACSAs), savings collections, supply shops, money
guards etc. which usually charge a high rate of interest on whatever is lent.
In India the apex financial institution which provide microfinance are
National Bank for Agriculture and Rural Development (NABARD),
Commercial Banks, Small Industries Development Bank of India (SIDBI),
Regional Rural Banks, Co-operative Banks, Non Banking Financial
Companies (NBFCs), etc.

ORIGIN OF MICROFINANCE

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T.Y.B.B.I. Microfinance

In order to reduce poverty, Bangladesh had introduced microfinance

in the name of Grameen Bank in 1976. The major objects of this project was
to facilitate and promote the standard of living of the poor by providing the
thrift (savings), credit and other financial services such as microcredit, micro
savings, micro insurance, etc. These institutions are financial non-
governmental organizations, financial cooperatives, etc. They provide small
amounts of credit at reasonable interest rates. Although credit is an
important part of microfinance, it is just one of the assorted financial
services which help to improve the lives of poor across the world. These
institutions help to spread the business in rural areas and stimulate the local
economic growth.

NABARD was carved out of the Reserve bank of India in 1982; the
apex financial institution for the development of the agriculture and rural
areas was constantly challenged to strengthen the rural credit delivery
system so as to enable the rural poor to access small loans from financial
institution. With perhaps one of the most impressive institutional
infrastructures, this should not being difficult task, particularly given the fact
that most of the banks were government-owned. To supplement credit
provision in the rural areas, Regional Rural Banks (RRBs) were established
across the country in 1975, in addition to the already existing institutional
infrastructure of the cooperative and land development banks. Coupled with
statutory priority-sector lending obligations, the flow of finance to the rural
poor under poor under this regime should not have been an issue.
MICROFINANCE SECTOR IN INDIA

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T.Y.B.B.I. Microfinance

Microfinance has demonstrated the potential of building the social

capital of the poorest communities. The Asian journey begins with India
where the country’s first microfinance institution was set up in 1974, earlier
than the famous Grameen Bank which was set up in 1976. However, the
microfinance movement accelerated in the 1980s only. Like in other Asian
countries the operation was through small loan to ‘Self Help Groups’ of
women. From this small beginning, the microfinance sector grown
significantly in the past decade and half. National bodies like the Small
Industries Development Bank of India (SIDBI) and the National Bank for
Agriculture and Rural Development (NABARD) are devoting significant
time and financial resources on microfinance.

These points to the growing importance of the sector. The strength of

the microfinance sector in India is the diversity of approaches and forms that
have evolved over time. In addition to the home grown models of SHGs and
Mutually Aided Cooperative Societies (MACS), the country has learnt from
other microfinance experiments across the world, particularly Bangladesh,
Indonesia, Thailand and Bolivia, in terms of delivery if microfinance
services. Indian organization can learn from the transformation experience
of these microfinance initiatives.

WHAT IS EXCITING ABOUT INDIAN MICROFINANCE?

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T.Y.B.B.I. Microfinance

A Task Force on Microfinance recognized in 1999 that microfinance

is much more than microcredit, stating: "Provision of thrift, credit and other
financial services and products of very small amounts to the poor in rural,
semi-urban and or urban areas for enabling them to raise their income levels
and improve living standards". The Self Help Group promoters emphasize
that mobilizing savings is the first building block of financial services.

For many years, the national budget and other policy documents have
almost equated microfinance with promoting SHG links to the banks. The
central bank notification that lending to MFIs would count towards meeting
the priority sector lending targets for Banks offered the first signs of policy
flexibility towards MFIs. One could argue that MFIs are small and
insignificant, so why bother. The larger point is about policy space for
innovation and diversity of approaches to meet large unmet demand. The
insurance sector was partially opened to private and foreign investments
during 2000. Over 20 insurance companies are already active and
experimenting with new products, delivery methodologies and strategic
partnerships.

Microfinance programmes have rapidly expanded in recent years.

Some examples are:
Membership of Sa-Dhan (a leading association) has expanded from 43 to 96
Community Development Finance Institutions during 2001-04. During the
same period, loans outstanding of these member MFIs have gone up from
US$15 million to US$101 million.

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T.Y.B.B.I. Microfinance

The CARE CASHE Programme took on the challenge of working

with small NGO-MFIs and community owned-managed microfinance
organisations. Outreach has expanded from 39,000 to around 300,000
women members over 2001-05, Many of the 26 CASHE partners and
another 136 community organisations these NGO-MFIs work with,
represent the next level of emerging MFIs and some of these are already
dealing with ICICI Bank and ABN Amro.

In addition to the dominant SHG methodology, the portfolios of

Grameen replicators have also grown dramatically. The outreach of SHARE
Microfinance Limited, for instance, grew from 1,875 to 86,905 members
between 2000 and 2005 and its loan portfolio has grown from US$0.47
million to US$40 million.

Since banks face substantial priority sector targets and microfinance is

beginning to be recognized as a profitable opportunity (high risk adjusted
returns), a variety of partnership models between banks and MFIs have been
tested. All varieties of banks - domestic and international, national and
regional - have become involved, and ICICI Bank has been at the forefront
of some of the following innovations:

 Lending wholesale loan funds.

 Assessing and buying out microfinance debt (securitization).

 Testing and rolling out specific retail products such as the Kissan
(Farmer) Credit Card.

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 Engaging microfinance institutions as agents, which are paid for loan

origination and recovery, with loans being held on the books of banks.
 Equity investments into newly emerging MFIs.
 Banks and NGOs jointly promoting MFIs.

The 2005 national budget has further strengthened this policy

perspective and the Finance Minister Mr P. Chidambram announced
"Government intends to promote MFIs in a big way. The way forward, I
believe, is to identify MFIs, classify and rate such institutions, and empower
them to intermediate between the lending banks and the beneficiaries."

What is beginning to happen in microfinance can be seen from the

perspective of what has happened to phones in India. With the right enabling
environment, and intense competition amongst private sector players, mobile
phones in India expanded by 160% during just one year 2003-04 (from 13 to
33 million). Mobile tariffs fell by 74% during the same period. While this is
heady progress, there is a less heralded but even more powerful nationwide
success on access. In the late eighties, the phone infrastructure was the
monopoly of public sector institutions. Phones were difficult to get and even
more difficult to use for those lacking ownership. Realization that users need
not own a phone to access one led to privatization of the last mile - where a
phone user could interface with a private sector provider using the public
sector telecom infrastructure. Even with this policy change, today there are
2.5 million entrepreneurs selling local, national and international phone
services through the length and breadth of India. Many of these are now

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graduating to sell internet services and could potentially be banking agents -

that is the evolving story.

Savings services are needed by many more customers and as

frequently as access to phone services. Many poor households value access
to savings services and find new providers and arrangements, despite
hearing of unreliable savings collectors or even occasionally falling prey to
such arrangements. Many customers are rich, literate and lucky to have
banks working for them. But many others lack access to safe, secure and
accessible savings services for the short, medium and long terms. In the past,
many banks sent collectors to gather these savings but problems with
monitoring, inability to tackle misappropriation and the rising aspiration of
collectors to become permanent staff of public sector banks killed a useful
service. The central bank has strictly forbidden commercial banks from
using agents in collection of savings services. This is unfortunate as:

Effective microfinance delivery is about managing transaction costs

for providers and customers. A combination of agents and technology can
play a powerful role in rightly aligning incentives for the collector and
customers, while keeping transaction costs manageable for everyone.

The banks can only open so many branches, and fixed and operating
costs are high, apart from approvals still needed from the central bank to
open new branches or close existing ones. The appointment of agents can
keep costs manageable and offer greater flexibility to Banks.

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Banking service may not be able to defy the commercial logic pursued
by most other sectors where a variety of retailers provide services to
customers, while companies focus on customer needs, product design,
quality control, branding, logistics and distribution.

Fortunately, the 2005 Budget opened a small window in this area and
the central bank annual policy recently confirmed discussions on this: "As a
follow-up to the Budget proposals, modalities for allowing banks to adopt
the agency model by using the infrastructure of civil society organisations,
rural kiosks and village knowledge centers for providing credit support to
rural and farm sectors and appointment of micro-finance institutions (MFIs)
as banking correspondents are being worked out." But readers may note that
between the budget and the annual policy statement, "credit" has again crept
in as the key perceived need.

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T.Y.B.B.I. Microfinance

THE INDIAN CONCEPT

In India microfinance is generally understood, but not clearly defined.

For instance, if an SHG gives a loan for an economic activity, it is seen as
microfinance. But, if a commercial bank gives a similar loan, it is not likely
to be treated as microfinance. In the Indian context there are some value
attributes of microfinance.

 Microfinance is an activity undertaken by the alternate sector (NGOs).

Therefore, a loan given by a market intermediary to a small borrower

is not seen as microfinance. However, when an NGO gives a similar
loan it is treated as microfinance. It is assumed that microfinance is
given with a laudable intention and has institutional and non
exploitative connotations. Therefore, we define microfinance not by
form but by the intent of the lender.

 Microfinance is something done predominantly for the poor. Banks

usually do not qualify to be MFOs because they do not predominantly

cater to the poor. However, there is ambivalence about the Regional
Rural Banks (RRBs) and the new Local Area Banks (LABs). In
normal course one would not ascribe the value attribute of an MFO to
them.

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T.Y.B.B.I. Microfinance

 Microfinance grows out of development roots. This can be termed as

the “alternative commercial sector”. MFOs classified under this head

are promoted by the alternative sector and target the poor. However,
these MFOs need not necessarily be “developmental” in the
commercially. Here MFOs that are offshoots of NGOs and run
commercially. There are commercial MFOs promoted by the people
who have developmental credentials. We do not find commercial
organisations having “microfinance business”.

 The reserve bank of India (RBI) has defined microfinance by

specifying criteria for exempting MFOs from its registration
guidelines. This definition is limited to non-profit companies and only
two MFOs in India qualify to be classified as microfinance
companies.

Issue that trigger transformation

We examine the five significant issues that trigger the transformation of

NGOs into MFOs.

1. SIZE:-

The most significant issue that triggers a transformation is growth. This

affects the promoters as well as providers of microfinance. In organisation
like Mysore Resettlement and Development Agency (MYRADA) and South
Indian Federation of Fisherman Societies (SIFFS), which promoted credit

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groups, banks were unwilling to provide loan at the same pace at which
microfinance customers needed them. It was nor easy for MYRADA or
SIFFS to deal with the attitudes of people meaning in this organisations. In
several instances it was an enthusiastic bank manager who made the
difference and this was not institutionalized. In such situation, NGOs tend to
get into action by opening a microfinance division or by setting up a
separate MFO. The genesis of several Indian MFOs is rooted in the failure
of banks to meet the needs of the poor.

2. Diversity:-

Another trigger for transformation is the diverse financial services that

an MFO wants to offer. In most cases, NGOs start with credit but soon
realize the need to provide other support services. While MFO reduced their
own lending risks through group guarantees and addressed the issue of
willful default, they have not been able to grapple with the situation where
the underlying economic activity fails and the borrower faces a genuine
problem.

3. Sustainability:-

Sustainability is closely linked to growth. Beyond a certain level,

MFOs have to seek external funds for keeping the credit activity going.
When MFOs seek funds from financial institutions, issues like ownership
structure and capital adequacy become critical. For MFO to survive in long
run, it has to transform itself into as institution with transparent system and
accountability. In most of cases the promoters of MFOs do not have
sufficient capital to invest and, therefore, the main constraint is that they are
dealing with “other people’s money”. NGOs have to clear-cut ownership

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structure, and making people liable under this format is a problem. The only
option they have in order to be sustainable is to deal with mainstream
institutions (Rhyne, 2000).

4. Focus:-

NGOs need to maintain focus on their original mandate. Undertaking

microfinance is transaction intensive and requires distinct orientation and
skills. For NGOs there is always a conflict between microfinance, which
earns returns and, therefore, “commercial” and other activities that are
“developmental”. This is the reason why NGOs spin off their own
microfinance activities. The entity that emerges to carry out microfinance
should be understood by the mainstream and, therefore, it should have an
appropriate institutional form.

5. Taxation:-

When an NGO carries out commercial activities (microfinance) on a

large scale, it is liable to lose its “tax free” status and is likely to jeopardize
its other activities. Even grants may become taxable. This is a major concern
for NGO-MFOs. This also triggers a search for an alternative source, where
microfinance could be kept isolated.

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SELF HELP GROUP (SHG):

SHG is unregistered group of less than twenty people (any structure of

more than twenty has to be registered) from a homogeneous class who come
together for addressing their common economic problems. They are
encouraged to make voluntary savings on a regular basis. They use this
savings to make interest-bearing loans to their members. This process i.e.
saving, lending and recovering it back imbibes the essentials of financial
intermediation including prioritization of needs, setting terms and conditions
and keeping financial accounts. This helps in building financial discipline
and more impotently credit history for themselves, as the money involved in
landings is their own ‘warm money’, the lending is done very carefully and
the entire money is recovered [zero tolerance default].
The group members also learn to handle larger suns of money which
are much beyond their individual savings. This process also makes them to
understand the basic principle of banking that money has a time value and is
a scare resource. The groups which learn this basic proves of savings,
lending and recovering it back, are ready to be linked to the bank. Linking
means access to larger resources as well as the security of their saving when
they have surplus. The banks take the advantage of lending to the group and
the group rakes the responsibility of prioritizing the loan demands from the

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members and fixing the terms and conditions of sanction. In other words, the
banks get the advantage of lending to those who have experience in
borrowing and repaying and additionally major part of their costs of
sanctioning, disbursing, monitoring and recovering are externalized. The
bank’s loan amount adds to the small savings which the group had
accumulated and thereby the availability of resources increases. The banks
are able to lend at the normal commercial rate of interest; there are no
subsidies and the money comes back. The peer pressure among the group of
members ensures timely repayment as the group’s own accumulated savings
are part and parcel of the aggregate loans made by the group to their
members and there are other members waiting as to when their demands
loan would be prioritized by the SHG. The conventional collateral is
substituted by more effective collateral [the peer pressure].
The crucial judgment of the banker is to assess when the SHG is ready
for receiving bank loan and how much should be sanctioned. In the Pilot
Project (1992), NABARD had suggested that the bank loan should be in
multiple of the accumulated thrift of the SHG. The idea was not to exceed
1:4 and the suggestion was to start slowly by 1:1 or 1:2 and gradually
increase. It was also suggested that the credit linkage was not to be done
before six months of the members of the SHG doing regular thrift and the
money so collected was used for lending among them and recovered. Many,
particularly the non-bankers were unhappy with the ‘waiting period’ of six
months. Fortunately, NABARD and the banks stuck to it and ensured that
only mature SHGs were credit linked.
The important features of the product developed under the SHG-Bank
linkage Programme are as under:

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 Groups of homogeneous people from similar economic background

living in the neighborhood.
 Focus on woman.
 Saving first, credit later. Small fixed saving at regular interval. It helps
in building up financial discipline.
 Shorter repayment period.
 Progress lending.
 No subsidies.
 The SHG deciding the quantum as also the terms as conditions for
loans to members.
 No subsidization of interest.

The linkages were in the two main areas:-

(1) Institution – linkage between the SHG and the Banks, directly or
through the NGO or other self-help group promoting institutional
(SHGPI).
(2) Financial linkage between savings and credit (discussed earlier).

SHG Model

The strategy involved in this model is that of forming small, cohesive

and participative group of the poor, encouraging them to pool their savings
regularly and using the pooled savings to make small interest-bearing loans
to members and, in the process, learning the nuances of financial discipline.
Subsequently, bank credit also becomes available to the group to augment its

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resources for the purpose of lending to its members. The SHG-bank linkage
program has proved to be the major supplementary credit delivery system
with a wide acceptance by banks, NGOs and various government
departments. There are three models of SHG-bank linkages that have
evolved over time, especially in India.

Model 1: SHGs Formed and Financed by Bank:

In this model, the bank itself takes up the work of forming and
nurturing the groups, opening their bank accounts and providing them with
bank loans after satisfying itself regarding their maturity to absorb credit.
Here, the bank acts as the Self-help Group Promoting Institution (SHGPI).

Model 2: SHGs Formed by NGOs and Formal Organisations, but Directly

Financed by the Banks:

In this model, groups are formed by NGOs (in most cases) or by

government agencies like Velugu project in AP. The groups are nurtured and
trained by the agencies. The bank then provides credit directly to the SHGs
after observing their operations and maturity absorb credit. While the bank
provides loans to the groups directly, the facilitating agencies continue their
interaction with the SHGs. The model has also been popular with and more
acceptable to banks, especially in India, as most of the difficult functions of
social dynamics are taken care of either by NGOs or government agencies.
Around 75% of the total numbers of SHGs are financed under this model.

26
T.Y.B.B.I. Microfinance

Model 3: SHGs Financed by Banks Using NGOs and Other Agencies as

Financial Intermediaries:

For various reasons, banks in some areas are not in a position even to
finance SHGs promoted and nurtured by other agencies. In such cases, the
NGOs act as both facilitators and microfinance intermediaries. First, they
promote the groups, nurture and train them and then they approach banks for
bulk loans for on-lending to SHGs. Of late, this model is becoming more
popular with private sector banks in India as they are in a position to partly
fulfill their social lending obligation by giving bulk loans to intermediaries
(like NGO/MFI) for their onward lending to weaker sections.

Where the SHGPI was a NGO, the promoting institution also took
upon itself the role of keeping an eye on the SHG, providing technical
support in the matters of account keeping, holding of meetings, elections and
training etc. besides the NGOs, the banks also started promoting the SHGs.
In certain areas, the Panchayat Raj institutions or certain governmental
organizations have also promoted SHGs.

27
T.Y.B.B.I. Microfinance

VARIOUS PLAYERS PROVIDING MICROFINANCE

The microcredit, which has its roots in 1970s, lost its momentum for a
while. It achieved great deal in its progress by delivering financial services
to the people of urban and nearby areas. But, it failed to reach the populated
rural areas. Its other goal, i.e., eliminating the traditional moneylenders from
the business has been achieved partly.

There are four major categories of microfinance-providers, who are

engaged in the microfinance movement to achieve its goals. They are:

1. Informal Financial Service-Providers:-

This category includes pawn-brokers, money lenders, ROSCAs,

ACSAs savings collections, supply shops and money guards. These are very
flexible and easy to access. But these services are costly and are in limited
variety. There are high risks of losing money.

2. Member-owned Organizations:-

28
T.Y.B.B.I. Microfinance

This category includes Self-Help Groups (SHGs), financial

cooperatives and a variety of hybrid organizations like Financial Service
Associations (FSA) and Self-managed Village Savings and Credit
Associations (SVSCAs). Generally, theses are small, situated in local areas
and have access to each other’s financial circumstances. Hence, these groups
offer convenient and flexible services. They have low cost of operations and
are managed by the poor. Simultaneously due to lack of awareness about
financial services, poor are getting into trouble when they are in need of
money to perform their daily activities. Hence, these member-owned
organizations are playing vital role in the lives of poor.

3. NGOs:-

They play significant role in lending microfinance. They began their

operations by promoting financial services to the poor and low-income
households in rural areas of the developing countries. Recently, the RBI has
permitted NGOs to merge with microfinance activities for the promotion of
the External Commercial Borrowing (ECB) up to $5mn. Of late, the SIDBI
has provided a need-based financial support to poor and assembled efficient
and well-performing NGOs and microfinance institution in Orissa.

4. Formal Financial Institutions:-

This category consists of commercial Banks, state-owned banks,

agricultural development banks, savings banks and NBFCs, which are well-
regulated and supervised. They have branch network spread over nationally
and internationally which offers a wide range of products. But, they have an
expensive operation framework which enables them to serve the poor or
remote population.

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T.Y.B.B.I. Microfinance

So, to solve the microfinance problems, these institutions can bridge

leverage through appropriate regulation and supervision. It helps the
microfinance movement to achieve its goals rather quickly and effectively.

5. NABARD:-

NABARD should promote and ensure a rapid growth of microfinance

sector in terms of formulating policies for good governance and
transparency, supervising with benchmarks, facilitating the maturity in
credit-rating norms and maintaining specific accounting and auditing norms,
etc.

Various thrift services that are offered by every MFI should obtain a
certificate of registration from NABARD and those who do not offer thrift
services are required to file their returns with Nabard. There are some
limitations which require certification from Nabard if the MFIs are ready to
accept the confines such as the general character of the management is not
prejudicial to the interest of eligible clients; the act owned funds of the MFI
is at least Rs. 5 Lakhs; the MFI has been in existence for at least three years
etc. NABARD possesses the authority to revoke the registration, if an MFI
which ceases the thrift services or fails to comply with any of the conditions
on which the registration is granted or any direction issued by NABARD or
does not tender account books or other documents for inspection. If an MFI
disobey any prescribed provision, NABARD may also forbid such MFI from

30
T.Y.B.B.I. Microfinance

accepting thrift services. Every MFI has to generate a reserve fund by

allocating a minimum of 15% of its net profit or surplus realized out of
saving services and microfinance services. This fund will be invested in
some specified securities suggested by Nabard.

NBFCs play a vital role in distributing and using microfinance in

India. Microfinance is offered through two channels, i.e., SHG Bank
Linkage and MFIs. About 70% of the loans distributed in the rural areas in
India are through MFI channels. Few other important recommendations are
pertaining to MFIs such as reducing the foreign equity requirement to $1
lakh from $5 lakh, transferring the regulation of NBFC MFIs over to
NABARD and also to furnishing tax concessions of 40% of their profits if
they work in exclusive districts as identified by NABARD.

The uniqueness of SGHs is to empower the poor to enable and control

the direction on own development by categorizing their felt needs. These
SGHs add a very significant dimension to microfinance. In 1992, NABARD
gave stimulus to the movement by starting the SHG Bank linkage program.
It was the first major effort to link the conventional financial institutions
with the informal groups.

6. Microfinance in banks:-

Traditionally, banks incurred substantial cost in managing the client’s

accounts. This is true irrespective of sum of money involved. Generally,
poor people possess small amount of money. If banks decide to serve these
people, their break-even points in loans and deposits will be affected
seriously and they have to incur loss. But, with economic growth in rural

31
T.Y.B.B.I. Microfinance

areas through microfinance, banks are developing an interest in

microfinance. In the case of ICICI bank, there has been a huge development
in rural microfinance and agri-business loans within 9 months time and there
is growth in financial turnover with an average of Rs. 5,200 cr to Rs. 10,000
cr. Microfinance shows its impact on the bank’s growth, customer
relationship and accumulates 3.2 million low-income customers. India’s
largest international bank, Standard Chartered Bank is planning to involve in
microfinance to increase the Bank’s turnover from Rs. 100 cr to Rs. 500 cr.
The ABN Amro Bank believes that microfinance is a powerful tool for
addressing poverty, empower the socially-marginalized poor and strengthen
the social fabric.

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T.Y.B.B.I. Microfinance

THE CASE OF ICICI BANK

India's second largest commercial bank, the ICICI Bank, was quick to
recognize the microfinance market as a profitable investment, and eagerly
seized the opportunity to expand its business while improving the lives of
poor people. It utilized two business models to expand its presence in India,
viz., the bank-led model and the partnership model. The article discusses
these unique models which helped the ICICI Bank extend credit directly to
India's rural areas without investing much in initial developmental costs.

Since the concept was born in Bangladesh almost three decades ago,
microfinance has proved its value, in many countries, as a weapon against
poverty and hunger. It really can change people's lives for the better,
especially the lives of those who need it most.
- Kofi A Annan, the UN Secretary General (Retired)

ICICI Bank, one of the largest private sector banks in India, ventured
into microfinance in 2001, and within a short span of time, it achieved

33
T.Y.B.B.I. Microfinance

remarkable progress. The microfinance portfolio of the Bank grew from $16
mn to $6 mn (the average loan is $223) from 2001 to 2003. Adopting the
partnership model, it extended credit facilities directly to rural masses.
Information irregularity, inability of poor people to offer collaterals and lack
of details of credit history were the major challenges it faced. Apart from
providing credit to rural people, it planned to develop various financial
products like weather insurance, health insurance, remittance services and
commodity derivatives. Despite these developments, the question that
remains is whether the ICICI Bank will be able to sustain its success in the
Indian microfinance sector as more and more entities have begun to jostle
for a share in the burgeoning sector.

Historically, in India, credit given to the poor was viewed as a

government program which required large amounts of subsidy. The
nationalization of banks initiated by the late Primer Minister Indira Gandhi
in 1969 compelled commercial banks to open branches in rural areas. As a
result, the share of banks in rural household debt increased to 29% in 1981.
In spite of such developments, there was only a little progress towards
providing the rural poor with access to formal credit as rural banks served
rich rural borrowers who had access to bank accounts.
In 1978, Integrated Rural Development Program (IRDP) was launched to
alleviate India's rural poverty. The main objective of the program was to
provide loans to needy rural households. A government evaluation, later in
1989, revealed that only a mere 28% of people assisted under IRDP crossed
the poverty line, compared to 33% supported by private sector programs.
Bureaucratic delivery systems with high transaction cost, unsuitable
financial products for the poor and inefficient coordination of the program

34
T.Y.B.B.I. Microfinance

were the major factors responsible for poor performance of the government-
assisted project.

During 1990s, following the liberalization of the Indian economy, the

financial and banking system witnessed major structural changes and
adjustments. The partial deregulation increased competition and led to the
development of a new approach to microfinance. In 2002, the average
population served per commercial bank branch stood at 15,000, reflecting
the deep root of the Indian financial system. Compared to other developing
countries, India showed a strong outreach in terms of active borrowers per
microfinance institution during 2005-2006.

35
T.Y.B.B.I. Microfinance

In India, organizations involved in microfinance can be divided into

`Mainstream' and `Alternative' Microfinance institutions. The former include
National Bank for Agriculture and Rural Development (NABARD), Small
Industrial Development Bank of India (SIDBI), Housing Development
Finance Corporation (HDFC), commercial banks, Regional Rural Banks
(RRBs), and the credit cooperatives. On the other hand, the latter exist to fill
the gap between demand and supply for microfinance. They comprise Non-
Government Organizations (NGOs) (which mainly focused on promoting
Self-Help Groups (SHGs) and linking them with banks), cooperatives and
non-banking finance companies.

But, the Indian microfinance sector witnessed strong links with

informal local groups known as SHGs (promoted by NGOs); the term used
for unregistered groups of 10 to 20 members involved primarily in saving

36
T.Y.B.B.I. Microfinance

and credit activities. The participating members save periodically in the

group and these savings are lent out to the members who require loans at a
fixed rate of interest. According to the industry experts, SHG-Bank Linkage
is set to become India's dominant system of mass-outreach banking system
for poor. Since 1990s, nearly 700,000 SHGs obtained more than Rs. 20 bn
($425 mn) as loans from banks.

The SHG-Bank Linkage Program, developed and managed by

NABARD, was started in 1992 as a pilot project and was upgraded to a
regular banking program in 1996. Experts opined that lower interest rates
and high-level of liquidity with banks made the SHG-Bank Linkage program
profitable for the banks. Besides, Nabard also created `Microfinance
Development Fund' contributed by the Reserve Bank of India, which
expanded and attracted more banks to the microfinance sector.

ICICI Bank: Doorway to Microfinance:-

The ICICI Bank was promoted in 1994 as a wholly-owned subsidiary

of ICICI limited (a development financial institution for providing medium-
and long-term project financing to Indian businesses). In 2002, after the
consideration of various corporate structuring alternatives, the ICICI Limited
and ICICI Bank were merged to create leadership position in Indian
financial sector. It offered a wide range of commercial banking products and
services to retail and corporate customers through a network of more than

37
T.Y.B.B.I. Microfinance

950 branches and 3,300 ATMs in India and presence in 17 countries. At the
end of March 2007, its total asset base was Rs. 3,446.58 bn ($79 bn).
The ICICI Bank witnessed untapped opportunities in rural markets as 41%
of adult population did not have access to formal banking facilities.
According to Nachiket Mor, Deputy Managing Director of the ICICI Bank,
"The informal credit segment is about $82 bn." Instead of conventional
branch banking model, the ICICI Bank adopted a different strategy to foray
into rural markets in the country. In December 2000, it merged with Bank of
Madura (BoM). BoM had a substantial network of 77 branches in the rural
areas of Tamil Nadu. The BoM developed a model and became an expert in
catering to the needs of the small and medium sector with well-developed
network of 1,200 SHGs. After the merger, the ICICI Bank started working
on BoM model combining intermediary forms of organization to capitalize
their strengths in rural markets.

Partnership Model:-

To ensure profitability, it adopted a three-tier business model to reach

the rural poor by offering them microfinance products and services.
Establishment of hierarchical structure ensured scalability of the operation.
The top positions were retained by the employees of the bank. The
coordinator (usually an SHG) was asked to report to the project manager and
supervise a group of 20 people for 12 months, upon which promoter would
receive financial compensation from the bank.

38
T.Y.B.B.I. Microfinance

For the implementation of the program, the ICICI Bank partnered

with selected NGOs on a long-term basis. The NGOs, with their past
experience in implementation of project, assisted the ICICI Bank to develop
field organization for the promotion and management of SHGs. The ICICI
Bank provided credit, savings and other services directly to the SHGs, apart
from providing working capital assistance to the NGOs to meet the cost of
promotion for the program.

With the implementation of such initiative, the microfinance portfolio

of ICICI Bank grew at an impressive pace. The ICICI bank reached 8,000

39
T.Y.B.B.I. Microfinance

SHGs in 2003 from just 1,000 SHGs in 2001, showing a high rate of growth
in its operation. The expertise of BoM helped the Bank to extend its
products and services to more SHGs. The outstanding portfolio increased to
Rs. 9.98 bn ($ 227 mn) from a level of Rs. 0.20 bn ($4.5 mn).

Towards Commercialization:-

According to Nachiket Mor, "Providing enough finance does not

always mean good economics, which demands that a poor farmer becomes
capable of articulating his financial needs. Financial needs arise out of
economic activities that are sustainable. For this, the poor need not only
capital, but also real services. We are in constant dialogue with the central
banking authority to improve financial inclusion. The recent business
correspondent rules—that are a perfect fit to our strategy—sell more than a
1,000 savings accounts each day."

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T.Y.B.B.I. Microfinance

The ICICI Bank developed market-based approach whereby it

targeted the extremely poor by providing them access to basic financial
services. To provide basic financial services, it emphasized on the
participation of mainstream organizations to facilitate community-based
institutions. It initiated development of community-based financial
institutions. The Bank developed network organizations which could
establish link between rural poor and large markets. These efforts helped
them to attain minimum level of subsistence.

The ICICI Bank entered into a partnership with SHARE Microfinance

Ltd. (SML), a microfinance institution, operating in rural areas of Andhra
Pradesh, to securitize microfinance portfolios. The US-based Grameen
Foundation supplied collateral deposit of $325,000 for technical assistance.
As per the agreement, the ICICI Bank purchased a part of SHARE's
microfinance portfolio against consideration of $4.9 mn at Net Present Value

41
T.Y.B.B.I. Microfinance

(NPV) of receivables at an agreed discount rate. The interest payment was

4% less than that of commercial banks.

SHARE provided credit provision in the form of guarantee amounting

to 8% of the receivables under the portfolio as a fixed deposit. This
arrangement helped SHARE to increase its lending. The ICICI Bank gained
in terms of reaching to new markets and by trading high quality assets in
capital markets to hedge its own risk. Janet MacKinley, Vice Chairperson of
Grameen Foundation, said, "I believe it will encourage more of these types
of transactions that can play a strategic role in making microfinance more
widely available to the world's poorest communities."

The ICICI Bank started encouraging venture capitalists to scale up

equity needs of the microfinance sector. Venture capitalists like Lok Capital
and Aavishkar had shown their interest to identify and mentor entrepreneurs.
The Bank entered into an agreement with these venture capitalists to provide
financing to microfinance institutions and buy out the venture after a period
of three to five years, once the operational sustainability was achieved. Apart
from these initiatives, the Bank established the Center for Microfinance
Research (CMFR) at the Institute for Financial Management Research
(IFMR) in Chennai. It aimed at conducting research, research-based
advocacy, training and strategy building activities in the field of
microfinance.

Future Ahead

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T.Y.B.B.I. Microfinance

Apart from regulatory issues, information irregularity was the biggest

challenge faced by the ICICI Bank. Also, the inability of the poor people to
offer collateral, details of their credit history and difficulty in evaluating the
success potential of the enterprise were major concerns. The high cost of
intermediation with low use of technology and high supervision cost
necessitated the Bank to implement innovative strategies. For instance, it
established 200 rural branches, 1,500 credit access points and 5,000 kiosks.
Apart from these, it has planned to expand its presence in more than 450
rural districts by 2008.

The ICICI Bank has planned to offer weather insurance, health

insurance, remittance services and commodity derivatives services to make
its presence felt by providing a wide range of financial services to the rural
masses. Under weather insurance, it will launch index-based rainfall
insurance product which compensates the farmer for loss in yield due to
deficient rainfall.

For remittance services, it plans to establish fund transfer facility

between urban centers and villages, especially to cater to the migrant
population. By developing commodity derivatives, it will ensure price
discovery and hedging against price risks by small farmers by participating
in commodity exchanges with NGO and MFIs.

According to industry experts, commercial banks need to evaluate the

sustainability of the SHGs as financial intermediaries and develop external
appraisal system.

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T.Y.B.B.I. Microfinance

CHALLENGES FOR MICROFINANCE

Expanding access of the poor and near-poor to sustainable

microfinance is the greatest challenge facing the microfinance industry.
Many microfinance stakeholders see provision of commercial microfinance
as the way to achieve this goal. However, several challenges to microfinance
commercialization exist at the micro (institutional) and macro (operational
environment) levels. Below are a few of the most pressing challenges:

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T.Y.B.B.I. Microfinance

Internal Constraints:-

The most pervasive internal constraints to commercial microfinance is

the perception problem. Because the microfinance market is not
monopolized by microfinance NGOs, a big internal challenge faced by
potential players in the market (e.g., rural banks and cooperatives) is the lack
of appreciation of the viability and sustainability of microfinance as a market
niche. Both the rural banks and the credit cooperatives have long been in
operation but have only been recently engaged in the microfinance business.
The perception problem, however, is partially based on the lack of ability or
flexibility of the existing systems of rural banks and cooperatives to
accommodate the unique features of microfinance technologies.
Most other internal constraints faced by existing MFIs and potential new
entrants have significant differences according to institutional type. The
internal constraints in rural banks, cooperatives, and microfinance NGOs are
examined below.

1. Rural Banks:-

Rural banks are ideally suited to the provision of commercial

microfinance in that they are formal financial intermediaries run on a for-
profit basis and have a wide client base over which to diversify risk. Rural
banks are managed on a continuing basis with the same staff. This helps to
keep information costs low when selecting micro- and small-scale borrowers
and helps to build trust and confidence among clients who want to deposit
small savings. These relations between customers and the bank,

45
T.Y.B.B.I. Microfinance

characterized by mutual trust, also attract some clients who could deposit
with commercial banks.

Access to support services is also a constraint. The development of

new microfinance products and services, the training of staff, and the
enforcement of effective auditing and control mechanisms are expensive.
The costs involved are too high for a single rural bank.

2. Cooperatives:-

Unlike rural banks, cooperatives are considered semiformal

institutions; they are regulated and supervised by the CDA but this
supervision is known to be weak. Lack of transparency has historically been
a major difficulty in assessing cooperative performance.

Cooperatives, like the rural banks, suffer from a lack of an effective

network. Access by cooperatives to support services also remains weak.

3. Microfinance NGOs:-

With the growing scarcity of donor funds for microfinance on lending,

most microfinance NGOs are now faced with the challenge of finding funds
from commercial sources or from deposits of their member-clients. Because
deposits are considered a cheaper source of funds than commercial loans, the
inability of NGOs to mobilize deposits legally poses a significant internal
challenge. Lack of legal identity stemming from weak ownership and
governance structures poses the greatest challenge to microfinance NGOs in
accessing funds to provide microfinance on a commercial basis.

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T.Y.B.B.I. Microfinance

Commitment to balancing social and commercial objectives is also an

important internal challenge faced by most microfinance NGOs. Most
microfinance NGOs, therefore, remain small and weak and dependent on
fresh infusions of subsidized funds for their survival. Related to constraints
stemming from small size and weak capacity, many microfinance NGOs
face the constraint of poor access to appropriate systems and support
services.

Moreover inadequate management information systems and the lack

of capacity to undertake market research as two major constraints curtailing
their growth. Although computerization of systems has been identified as
essential to the growth of MFIs, there still appears to be a supply problem in
terms of affordable, commercially available, off-the-shelf software packages
that suit the system and information requirements of MFIs.

Market research is a relatively new concern for most MFIs, prompted

by increased client exit (heightened drop-out rates) and the desire to improve
repayment performance. Given the strong recent interest in undertaking
market research, the need to build this capacity in MFIs is great, especially
in microfinance NGOs, which face limited funding to support their increased
lending.

CONSTRAINTS IN THE OPERATING ENVIRONMENT

1. Threat of Policy Reversal:-

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T.Y.B.B.I. Microfinance

The very convenient nature of direct credit provision by government

makes it politically expedient and tempting for policymakers to revert to the
previous policy of regulating interest rates and supporting directed credit
programs. The challenge to prevent this lies not only with the Government
but also with private sector MFIs. It is imperative for all types of MFIs to
close ranks and advocate actively that the Government continue moving
away from outright credit provision and focus its interventions where it has
distinct comparative advantage.

2. Unclear Regulation and Supervision Concerning Microfinance

Operations:-
Significant improvements have been made in the last few years by the
Government in recognizing microfinance and adapting regulation and
supervision to the specialized nature of microfinance operations. Until the
rules of engagement of formal financial institutions in microfinance are
complete, uncertainties regarding the final form of regulation and
supervision of microfinance-oriented banks may curtail efforts by formal
institutions to downscale their operations.

3. Inadequate Access to Commercial Sources of Funds:-

One of the consequences of not being able to mobilize deposits

overtly is that many microfinance NGOs remain highly dependent on
external funding, which has historically come from donors.

4. No Credit Information Bureau that Captures Microcredit Information:

With increasing microcredit provision by microfinance NGOs, rural

banks, and cooperatives, creation of a credit bureau that captures microcredit

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T.Y.B.B.I. Microfinance

information from these actors is becoming increasingly vital to the continued

health of the industry.

5. Lack of Microfinance Training Centers:-

There is a variety of microfinance training programs. However, no

“one-stop shop” yet exists for the provision of regularly scheduled, demand-
driven, and affordable technical courses on microfinance program
management and operation. CARD’s microfinance training center is perhaps
the best known and most widely used, but it cannot be considered as a
wholly professional training institution that would attract a wide variety of
regular students from different types of MFIs. The institution that seems
most suitable for offering additional microfinance training on a regular basis
is Punla, provided that its management focuses on developing demand-
driven courses suitable for a wide range of viable MFIs. To serve as the one-
stop shop to build the technical capacity that the industry needs for further
professionalization and commercialization, Punla will need to shift its focus
more toward serving the complex and varied needs of commercial
microfinance providers.

FINDINGS

To go through this project:-

 Masses in the country are unaware on has very little knowledge about
Microfinance.

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T.Y.B.B.I. Microfinance

 People hardly know the difference between microfinance and

microcredit.
 People are not taking the help of microfinance institution in over to
get finance.
 Effort made by government to increase the awareness about the
microfinance is appreciable but along with government all the NGOs,
corporate should assist in spreading the information about
Microfinance from grass route level.

FUTURE OF MICROFINANCE

It has been clear for many years now that microfinance is becoming
increasingly integrated in the much broader world of mainstream markets
and financial systems. The aim for the future is the development of deep
domestic financial markets with sound and healthy financial institutions that
serve the majority of the poor population. Future sources of funds will be

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mainly domestic savings, and the role of financial intermediaries is to

provide critically important deposit services, recycling these savings into
productive loans for the poor.

Recently the external NGOs having allowed to avail External

Commercial Borrowings (ECBs) route the mobilizing their recourses.
Several foreign institutional and donor agencies are showing interest in
lending money to MFI in India

CONCLUSION

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T.Y.B.B.I. Microfinance

India is land of villages. According to the father of the nation,

Mahatma Gandhi, India can globally be visible only when its rural sectors
shine. He was the one to propagate the village and cottage sector so that
rural economy can grow and become prosperous. But, all this is only on
paper. Now the time come to restrict the entry of microfinance into urban
sector to promote rural marks and provide better, speedy and affordable
financing schemes. Infotech application in microfinance is laudable and with
emerging computer and communication technologies, it can be made as
simple tool for rural folks to adopt and availed the finance for the proposed
project to make the rural economy a dream. So the rural economy can
definitely contribute to the growth the of national economy with the
adoption of mixing infotech with microfinance

Microfinance has come a long way despite doubts expressed and

criticism launched about its viability, impact, and poverty fighting capacity.
The pioneers in the field and the practioners at large with their commitment,
determination, and innovations have not only demonstrated its power and
success, but also accelerated its growth. The task of building a poverty-free
world is yet to be finished. There are still over 1.2 billion people living in
extreme poverty on this planet. They are not living in one country or region
but spread all over the world.

Fortunately, there is an increasing awareness about the power of

microfinance, and the need to support its growth. Many players have
committed themselves to its promotion. Governments are taking an
increasing interest in it. More banks, both national and international are
coming forward with different support packages. NGO-MFI partnerships are

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on the increase. New instruments are being used to solve the problem of
funding. It is expected that in the coming years more ideas, innovations, cost
saving devices, and players will continue to reinforce the microfinance
movement and increase its expansion.

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