micro finance- threats and oppertunities
TRANSCRIPT
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a REPORT ON
MICROFINANCE - THREATS AND OPPORTUNITIES
Submitted By:
MANORANJAN PATRABM0308BM048
Under the Guidance of
Mr. MANAS RANJAN DAS Mrs. T.SRIDEVIUNIT HEAD FACULTYBASIX -Khurda Unit, Jatni Bharatiya Vidya Bhavan
BHUBANESWAR KENDRA
BHAVAN’S CENTRE FOR COMMUNICATION & MANAGEMENT
39,KHARVEL NAGAR,UNIT-III,BBSR-751001,ORISSA
APRIL-2010
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STUDENT DECLARATION
I hereby undertake and declare that this submission is my original work and, to the best of my knowledge and belief, it contains no material previously published or written by another person nor material which has been accepted for the award of any other degree or diploma of any Institute or other University of higher learning , except where due acknowledgement has been made in the text.
Signature
Name of Student: Manoranjan Patra
Registration No. BIM0308BM048
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Certificate by guide
This is to certify that work entitled Project title “MICROFINANCE - THREATS AND OPPORTUNITIES” is a piece of work done by Student’s name Manoranjan Patra under my guidance and supervision for the partial fulfillment of degree of PGDBM, Bharatiya Vidya Bhavan, Bhubaneswar.
To the best of my knowledge and belief the thesis:
a. Embodies the work of the candidate himself.b. Has duly been completed.c. Fulfills the requirements of the rules and regulations relating to the
summer internship of the institute. d. Is up-to the standard both in respect to contents and language for
being referred to the examiner.
Signature of the Faculty Guide
Name of Faculty guide: Mrs.T.Sridevi Date:
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CERTIFICATE OF APPROVALThis is to certify that the report entitled:
“MICROFINANCE - THREATS AND OPPORTUNITIES”
In BASIX
KHURDA
Submitted by Mr. MANORANJAN PATRA (Regn.No BIMO308BMO48),Bharatiya Vidya Bhavan, Bhubaneswar Kendra, Orissa towards partial fulfillment of the requirements for the award of the degree of Post Graduate Diploma in Management (PGDM) is a bona fide record of the work carried out by him under the able guidance of Mrs.T.SRIDEVI, faculty, Bharatiya Vidya Bhavan, Bhubaneswar Kendra, Orissa.
DIRECTOR DEAN
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Acknowledgements
“No good work flows without the help from Faculty Members
Industrial Professionals, Colleagues, Organization and Friends”
First of all I would like to thank Mr. Manas Ranjan Das, Unit Head, Khurda Unit , BASIX
for providing me an opportunity to give effort to my project report from my working hours.
I would also like to thank Mr. Ranjit Patro, Head Accountant of the Khurda Unit for their
valuable guidance, Cooperation and encouragement which helped me lot in my project.
I am also thankful to my faculty in-charge Mrs.T.Sridevi for her guidance and valuable
input and advice during my project.
I am also thankful to Mr. Patanjali Behera & Mr. Manoj Ku. Behera, my senior collegues,
who helped me in understanding my topic in depth.
At the last, I would like to thank each individual who some or other way helped me to
complete my project.
MANORANJAN PATRA
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Contents
ACKWOLEDGEMENT
ABSTRACT
Overview of the Microfinance Sector
Top 50 Microfinance Institutions
Legal and Regulatory Framework for the (MFI’s) in India
Societies Registration Act, 1860
Indian Trusts Act, 1882
Not-For-Profit Companies Registered Under Section 25 Of Companies Act,1956
Analysis
Micro credit model
GRAMEEN Bank
About GRAMEEN Bank
Working model of Grameen bank
The Repayment Mechanism
Criticism of Grameen Bank
Self Help Group (SHG’s)
Concept of SHGs Need of SHG‘s Structure of SHGs
Joint Liability Groups (JLGs)
Difference between SHGs and JLGs
How JLGs formed
JLG features
BASIX
Services of basixAvailability of basix service in indiaTechnology assisted financial inclusion by BASIX
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Vidya samrudhiBasix academyStrategy for livelihood promotionStaffMisMicro credit for water and sanitationSocial performance reporting awardValues of basix Vision of basixBankers and partners of basixSenior management group profile of basixStrengths of basixIssues of basix
NABARD Initiative in Micro Finance
Introduction Role of NABARD Organization Structure NABARD‘s OFFICES all over INDIA Financial Santa Clause NABARD How NABARD helps Banks and MFI‘s in augmenting? How NABARD manages their repayment ratio How NABARD gives loan to the Institutions?
Credit institutions as a Political tool: Debt relief in India
Product Design
How MFI’s manage their repayment and Risk management
What is Risk Management?
Benefit of Risk Management
Financial Risks
Liquidity risk
Operational Risks
Strategic Risks
Why micro finance provides loan to the women only
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Why MFI‘s being critized for providing loans to the women only?
How the recent slowdown affects the MFI’s
How the MFI‘s find opportunities within the crisis
MFI’s being criticized because of high interest rate
Why Microcredit Rates are so high?
Inappropriate comparison
Rate Ceilings: Not the Answer
SWOT Analysis of micro finance
Interview of end users
Future of Micro Finance
Recommendations and Suggestions
Conclusion
References
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ABSTRACT of the Project:
Micro-Finance refers to ―small savings, credit and insurance services extended to socially and economically disadvantaged segments of society, for enabling them to raise their income levels and improve living standards‖. The main aim of Micro-Finance is too provide loan to the poor people or to below poverty line, who are not able borrow from other sources and to make their living standard better.
Micro- finance‘s concept was first given by the Nobel laureate Prof. Mohammad Yunus in 1976 and started Grameen Bank in that year and from then many countries has followed Grameen Bank Model. It is not possible to cover each and every aspect of Micro Finance in this short duration of time. But I have tried to cover main and the basics of Micro Finance. Through this report any person who doesn‘t know anything about Micro Finance can easily understands and makes decision on his own.
In this report I have tried to cover each and every important part related to the Micro Finance Sector i.e. Business Model of Grameen Bank, SHG‘s and BASIX, how they formed, role of Micro Finance in the current economy, study about their interest rates, role of women in the economy, how the product is design, interview of NABARD executive and understand the Business Model of NABARD, and many important things related to Micro Finance.
After successfully completion of my project, I understood many areas of Micro Finance. Like how a company decides their interest rate, practically how SHGs formed, how the excess of government intervention can create disaster for the MFIs, practically felt, how a Micro loan can change the life of the individuals. Practical learning of Micro Finance industry by personal visits the institutions and prepared the business model of the same. Now I can confidently say that, with zero percentage o to 70 percentage knowledge in the field of Micro finance in just three months, it‘s like Achievement for me and I will add this moment in my Achievements lists. What I feel that, in this short period of time its difficult to understand the 100 percentage of the above mentioned subject. But at last I am satisfied with my performance.
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Overview of the Microfinance Sector
Micro-finance refers to ―small savings, credit and insurance services extended to socially and economically disadvantaged segments of society, for enabling them to raise their income levels and improve living standards‖. India‘s population is more than 1000 million, and it‘s the second largest in term of population after China. India's GDP ranks among the top 15 economies of the world. However, around 300 million people or about 80 million households, are living below the poverty line, i.e. less than $2 per day according to the World Bank and the poorest are which earns $1 per day .
Out of these 80 million house hold, 80% takes credit from the informal sources i.e. local Zamidars, Chit Funds etc. With about 80 million households below poverty line and 80% out of this is access from informal sector, so it‘s obvious to solve this problem and this gave birth to Micro Finance Institutions (MFI‘s). MFIs include non-governmental organizations (NGOs), credit unions, non-bank financial intermediaries, and even a few commercial banks.
Microfinance is defined as any activity that includes the provision of financial services such as credit, savings, and insurance to low income individuals which fall just above the nationally defined poverty line, and poor individuals which fall below that poverty line, with the goal of creating social value. The creation of social value includes poverty alleviation and the broader impact of improving livelihood opportunities through the provision of capital for micro enterprise, and insurance and savings for risk mitigation and consumption smoothing.
According to International Labor Organization (ILO), “Microfinance is an economic development approach that involves providing financial services through institutions to low income clients”.
In India, Microfinance has been defined by “The National Microfinance Taskforce, 1999” as “provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards”.
"The poor stay poor, not because they are lazy but because they have no access to capital."
The dictionary meaning of ‘finance’ is management of money. The management of money denotes acquiring & using money. Micro Finance is buzzing word, used when financing for micro entrepreneurs. Concept of micro finance is emerged in need of meeting special goal to empower under-privileged class of society, women, and poor, downtrodden by natural reasons or men made; caste, creed, religion or otherwise. The principles of Micro Finance are founded on the philosophy of cooperation and its central values of equality, equity and mutual self-help. At the heart of these principles are the concept of human development and the brotherhood of man expressed through people working together to achieve a better life for themselves and their children.
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Microcredit, Microfinance and Micro plus
Microcredit refers specifically to loans and the credit needs of clients, while Microfinance covers a broader range of financial services that create a wider range of opportunities for success. Examples of these additional financial services include savings, insurance, housing loans and remittance transfers. The local MFI might also offer Microfinance plus activities such as entrepreneurial and life skills training, and advice on topics such as health and nutrition, sanitation, improving living conditions, and the importance of educating children.
Top 50 MICROFINANCE INSTITUTIONS :(as on 20/3/09)
Rank Name Country Risk Returns
1 ASA Bangladesh 56 40
2 Bandhan Society and NBFC)
India 42 1
3 Banco do Nordeste Brazil 213 254 Fundación Mundial de la
Mujer BucaramangaColombia 193 1
5 FONDEP Micro-Crédit Morocco 196 16 Amhara Credit and
Savings InstitutionEthiopia 118 42
7 Banco Compartamos, S.A., Institución de Banca Múltiple
Mexico 295 11
8 Association Al Amana for the Promotion of Micro-Enterprises Morocco
Morocco 133 1
9 Fundación Mundo Mujer Popayán
Colombia 141 1
10 Fundación WWB Colombia - Cali
Colombia 155 4
11 Consumer Credit Union 'Economic Partnership'
Russia 19 1
12 Fondation Banque Populaire pour le Micro-Credit
Morocco 219 1
13 Microcredit Foundation of India
India 7 185
14 EKI Bosnia and Herzegovina
242 1
15 Saadhana Microfin Society India 73 116 Jagorani Chakra Bangladesh 128 1
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Foundation17 Grameen Bank Bangladesh 100 6218 Partner Bosnia and
Herzegovina230 1
19 Grameen Koota India 156 120 Caja Municipal de Ahorro
y Crédito de CuscoPeru 222 119
21 Bangladesh Rural Advancement Committee
Bangladesh 126 205
22 AgroInvest Serbia 222 123 Caja Municipal de Ahorro
y Crédito de TrujilloPeru 220 101
23 Sharada's Women's Association for Weaker Section
India 55 13
24 MIKROFIN Banja Luka Bosnia and Herzegovina
205 1
25 Khan Bank (Agricultural Bank of Mongolia LLP)
Mongolia 280 59
26 INECO Bank Armenia 202 3927 Fondation Zakoura Morocco 194 1
*Risk, which looks at the quality of their loan portfolios, measured as the percent of the portfolioat risk greater than 30 days; and return, which is measured as a combination of return on equity and return on assets.
From this above table we can notice that the Risk of companies is measured as the percentage of Portfolio at Risk (PAR) which means and return is measured as a combination of ROA and ROE.
ROA = Net Operating Income-Taxes Average Assets
Return on Assets (ROA) indicates how well an MFI is managing its assets to optimize its profitability. The ratio includes not only the return on the portfolio, but also all other revenue generated from investments and other operating activities. From the above list we can notice that, there are seven companies of India in top 50 companies in the world. There is a huge potential for India to grow in this sector, because out of total 500 million poor people from all over the world, who is getting beneficial from the micro finance institutions, 80 to 90 million are from India only. So there is still a huge market and opportunities in this segment. The total loan that the MFI‘s had provided to the poor people in India crosses Rs 24 billion till October 08. And this is only 40% of the total poor. If this turns into 100%, then we will see the new face of India.
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Legal and Regulatory Framework for the Microfinance Institutions in India:
1. SOCIETIES REGISTRATION ACT, 1860:
NGOs are mostly registered under the Societies Registration Act, 1860. Since these entities were established as voluntary, not-for-profit development organizations, their microfinance activities were also established under the same legal umbrella. This act is applicable to the NGO‘s and the main purpose is: Relief of poverty
Advancement of education
Advancement of religion
Purposes beneficial to the community or a section of the community.
2. INDIAN TRUSTS ACT, 1882:
Some MFIs are registered under the Indian Trust Act, 1882 either as public charitable trusts or as private, determinable trusts with specified beneficiaries/members.
3. NOT-FOR-PROFIT COMPANIES REGISTERED UNDER SECTION 25 OF COMPANIES ACT, 1956:
An organization given a license under Section 25 of the Companies Act 1956 is allowed to be registered as a company with limited liability without the addition of the words ‗Limited‘ or ‗Private Limited‘ to its name. It is also eligible for exemption from some of the provisions of the Companies Act, 1956. For companies that are already registered under the Companies Act, 1956, if the central government is satisfied that the objects of that company are restricted to the promotion of commerce, science, art, religion, charity or any other useful purpose; and the constitution of such company provides for the application of funds or other income in promoting these objects and prohibits payment of any dividend to its members, then it may allow such co. to register under co.s act 1956.
RATIO ANALYSIS: Financial ratios are useful indicators of a firm's performance and financial situation. Financial ratios can be used to analyze trends and to compare the firm's financials to those of other firms.
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List Of MFI’s and their key Ratios:
Liquidity Ratios These ratios actually show the relationship of a firm‘s cash and other current assets to its current liabilities. Two ratios are discussed under Liquidity ratios. They are: 1. Current ratio 2. Quick/ Acid Test ratio. 1. Current ratio: This ratio indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future. Current assets normally include cash, marketable securities, accounts receivables, and inventories. Current liabilities consist of accounts payable, short-term notes payable, current maturities of long-term debt, accrued taxes and other accrued expenditures.
Current Ratio=Current Assets/Current Liabilities
S.no Companies As on 31.3.08(%) As on 31.3.07(%) Percentage changed
1. Asmitha Microfinance
18.0 6.81 195%
2. Basix Microfinance
5.65 5.74 1.56%
3. Ujjivan Microfinance
42 98 57%
4. Cashpro Microfinance
17.88% 15.91
5. Trident microfinance
3.33 4.47 25.6%
6. Samridhi Microfinance
16.81 19.36%
Explanation:- Here we can notice that the current ratio of all the MFI‘s. There is a mixed picture i.e.few company‘s ratio has dipped down and few went up, now we will see, why this so? Asmitha Microfinance‘s ratio went up by whopping 195% in 2008 compared to 2007. This was because of the high micro loan to the poor women and high cash and bank balance. So we can came out of the conclusion that the Asmitha Microfinance has more current assets then there liabilities to meet there short term obligations.
Basix Microfinance‘s ratio dipped down by mere 1.56% , reason for that there loans to the poor went up by 61%, but there current liability ( other provision )but went up by 69%.
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Cashpro Microfinance‘s has showed the highest percentage change from the previous year i.e. 205%. Its loan to the women went up by 121% and cash and bank balance by 52% and the current liability went down by 35%.
Trident Microfinance‘s current ratio went down by 26%, because of the high current liabilities and other provision.
Ujjivan Microfinance‘s ratio went down by 57%, its cash balance went up by 605 but its current liabilities went up by 247%.
Capital Adequacy ratio: Capital adequacy ratio is the ratio which determines the capacity of a bank in terms of meeting the time liabilities and other risk such as credit risk, market risk, operational risk, and others. It is a measure of how much capital is used to support the banks' risk assets. In short this ratio used to protect depositors and promote the stability and efficiency. Under this 2 main ratio is there:
Comparison among the Companies (07-08) Criteria
Asmitha Microfinance
Basix Microfinance
Trident microfinance
SKS
Capital Capital To Assets ratio
106.54% 12.63% 44.77% 19.52
Debts to Assets Ratio
89.79% 85.11% 35.79% -
Earnings ROA 1.24% 1.97% -1.92% ROE 30.83% 18.46% -5.24% 23.47% Operating self-sufficiency ratio
111.09% 114.4% 108.54% 121%
Social Impact % borrowers below poverty line
60% 57% 69% 65%
% women 98% 97% 98% 94% % landless 59% 61% 62% 53% First time borrowers
27% 45% 32% 29%
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Explanation: Calculating the debt ratio, we came to see that Asmitha microfinance institution is having the highest debt ratio, i.e. 96.39%. That this company is highly leveraged one. The reason behind such is better understandable form the balance sheet. In 2007-08, the company has issued long-term loan, of Rs 3,030,818,584 and this was increased by more than 50 % from the previous year.
From the above table we can notice that the, the Operating Self Sufficiency (OSS) ratio of the SKS Micro Finance was the highest, this shows that how well the company is managing their loan distribution amount or repayment amount to meet the operating expenses. By comparing this ratio with others, we can predict the future of the organization.
Now if we notice social impact ratio‘s like % borrowers below poverty line, % of woman etc. are very important for the economic development and the companies‘ contribution in reducing the poverty.
The micro-credits model
• The model is fairly straightforward and simple.
• Focus on jump-starting self-employment, providing the capital for poor women to use their innate "survival skills" to pull themselves out of poverty.
• Lend to women in small groups (credit circles), say of five or seven.
• Make loans of small amounts to two out of five.
• The three who have not received loans will be eligible only when this first round of loans has been repaid.
• Draw up a weekly or bi-weekly repayment schedule.
• In case any member defaults the entire circle is denied access to credit.
• Banks have been given freedom to formulate their own lending norms keeping in view ground realities. They have been asked to devise appropriate loan and savings products and the related terms and conditions including size of the loan, unit cost, unit size, maturity period, grace period, margins, etc.
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GRAMEEN BANK
The Grameen Bank is a Microfinance Organization and community development bank started in 1976 by the Nobel Laureate, Professor Muhammad Yunus in Bangladesh that makes small loans (known as microcredit) to the weaker sections, without requiring collateral or any deposit. The word "Grameen", derived from the word "gram" or "village", means "of the village. In October 1983, the Grameen Bank Project was transformed into an independent bank by government legislation. Grameen today has some 2,468 branches in Bangladesh, with a staff of 24,703 people serving 7.34 million borrowers from 80,257 villages. Grameen‘s methods are applied in 58 countries — including the United States. Grameen Bank borrowers own 94% of the Bank. The remaining 6% are owned by the government.
In October 1983 Yunus formed the Grameen (―villageǁ) Bank, based on principles of trust and solidarity. There is no legal instrument (no written contract) between Grameen Bank and its borrowers, the system works based on trust. In a country in which few women may take out loans from large commercial banks, Grameen has focused on women borrowers as 97% of its members are women.[ Because women (far more than men) could be counted on to invest the loans in business and repay them on schedule, they became the overwhelming participants in Grameen Bank, where they receive 97 percent of all credit.
Grameen bank follows the one principle that ―the more you have, the more you can get. In other words, if you have little or nothing, you get nothing. According to a World Bank study of Grameen, 5 percent of Grameen borrowers get out of poverty every year., according to Grameen‘s figures, nearly two-thirds [64 percent] of borrowers who have been with Grameen for five years are now out of poverty. And Grameen‘s indicators of poverty are much more stringent than those of the World Bank, which defines poverty as earning less than a dollar per day. Grameen‘s definition of poverty alleviate is not only based on financially sound of the family, but they notice the 10 indicators and all must be met before they say that family is no longer poor.. Indicators include such things as housing quality, adequate nutrition, and access to safe water, school attendance by children, certain minimal savings, etc.
Working model of Grameen bank:
The manager first makes a round to the appointed area to introduce Grameen policies and programs. When one approaches with genuine interests Bank manager asks her to gather 4 more members to form a group. Every group has 5 members, one as its head. Only two members can obtain loan at first. After 6 weeks of successful repayment another two can apply for loan. The leader can only receive loan at last. 8 groups make a Center. And a center elects its leader for one year, after one term the leader resigns and never be elected again.
Each borrower must belong to a five-member group. These groups do not provide any guarantee for a loan to one of their members; repayment responsibility solely rests on the individual borrower. However if one member of a group defaults, that group will never receive a loan from Grameen. So it‘s a kind of social pressure exerted by the group members. Grameen enjoys very high payback rates—over 98 percent.
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Grameen bank is not only a Micro financing institution but it is Micro financing plus, which means they not only provide credit to the borrowers this type of MFI believes that the poor need more than just money to transform their lives. Typical services to supplement the credit include discounted health care services, preventative health care education, literacy courses, vocational training courses, technology courses, youth programs for children of borrowers, life/disability insurance, and savings programs.
Grameen Bank is owned by the borrowers themselves — it is owned by the poor women who rely on the microcredit loans for income generation. It is therefore tied to local money; each branch has to be self-sustaining. Local branches get no money from outside — there is no borrowing from the head office. The profit all goes back to the borrowers.
Grameen bank has 21,000 students with student loans, studying in medical schools and elsewhere. They have also provided some 30,000 scholarships to the children of our borrowers each year. They even give loans to beggars — poor people who go door-to-door, who we call ―struggling membersǁ — so they can stop begging and generate income through selling such things as food, toys, or household items. They currently have 100,000 ―struggling membersǁ in the program.
Loan Insurance
How loan insurance would be beneficiary for the borrowers? Borrowers always worry what will happen to their debt if they die. Will the family members pay off their debt? They believe that if their debt remains un repaid after their death The insurance program is very simple. Once a year, on the last day of the year, the borrower is required to put in a small amount of money in a loan insurance savings account. It is calculated on the basis of the outstanding loan and interest of the borrower on that day. She. If a borrower dies any time during the next year, her entire outstanding amount is paid up by the insurance fund which is created by the interest income of the loan insurance savings account. In addition, her family receives back the amount she saved in the loan insurance savings account. Borrowers find it unbelievably generous. If the outstanding amount remains the same on two successive year-ends, the borrower does not have to put in any extra money in the loan insurance savings account in the second year. Only if the balance is more she has to put in money for the extra amount. Even if the outstanding amount happens to be several times more at the time of her death than what it was on the preceding year-end, under the rules of this program, the entire amount will still be paid off from the insurance fund. All the borrowers of Grameen bank have to pledge the ―16 Decisionsǁ. Of course, many of the women cannot read or write, so they have to listen to others recite the 16 Decisions, and then have to memorize them. This has become an extremely important part of our microcredit program. The ―16 Decisions‖ are mentioned under:
1. We shall follow and advance the four principles of Grameen Bank: Discipline, Unity, Courage and Hard work – in all walks of our lives. 2. Prosperity we shall bring to our families. 3. We shall not live in dilapidated houses. We shall repair our houses and work towards constructing new houses at the earliest. 4. We shall grow vegetables all the year round. We shall eat plenty of them and sell the surplus.
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5. During the plantation seasons, we shall plant as many seedlings as possible. 6. We shall plan to keep our families small. We shall minimize our expenditures. We shall look after our health. 7. We shall educate our children and ensure that they can earn to pay for their education. 8. We shall always keep our children and the environment clean. 9. We shall build and use pit-latrines. 10. We shall drink water from tube wells. If it is not available, we shall boil water or use alum. 11. We shall not take any dowry at our sons' weddings; neither shall we give any dowry at our daughter's wedding. We shall keep our centre free from the curse of dowry. We shall not practice child marriage. 12. We shall not inflict any injustice on anyone; neither shall we allow anyone to do so. 13. We shall collectively undertake bigger investments for higher incomes. 14. We shall always be ready to help each other. If anyone is in difficulty, we shall all help him or her. 15. If we come to know of any breach of discipline in any centre, we shall all go there and help restore discipline. 16. We shall take part in all social activities collectively
The Repayment Mechanism Following method is followed by Grameen for loan and repayment. - One year loan - Equal weekly installments - Repayment starts one week after the loan - Interest rate of 20% - Repayment amounts to 2% per week for fifty weeks - Interest payment amounts to 2 taka per week for a 1000 taka loan
Criticism of Grameen Bank: As the Grameen model was ‗exported‘ overseas during the 1990‘s, the Bank continued to grow in Bangladesh. Client numbers grew steadily, but the portfolio grew more quickly as clients took bigger loans and new types of loans (especially housing). Those of working in Bangladesh increasingly heard that repayment rates were falling, but that branch managers were massaging their performance figures by issuing new loans to defaulters. These were immediately used to pay off the outstanding loan and hide the problem of non-repayment.
There were also criticisms of the gender achievements of the Bank: did it merely get women to take loans that they gave straight to their husbands?
Then, there were criticisms of the idea by Yunus that, of every Grameen Bank loan being used for microenterprise, and every microenterprise being successful. Independent fieldwork showed that Grameen Bank clients used their loans for many different purposes – business, food consumption, health, education and even dowry.
Grameen Bank clients paid the kisti (weekly repayments) on their loans not from a single microenterprise, but from patching together earnings from casual employment, self-employment, remittances and a variety of loans from other sources. But, as clients stayed with Grameen Bank, they were under pressure to take bigger, ordinary loans alongside new housing loans. As a result, they took on levels of debt they could not service from their income. To stop them from defaulting, they were issued with larger loans by Grameen branch managers to repay earlier loans.
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SHGs
Self help group (shg) “A Self-Help Group (SHG) is a registered or unregistered group of micro entrepreneurs having homogenous social and economic background voluntarily, coming together to save small amounts regularly, to mutually agree to contribute to a common fund and to meet their emergency needs on mutual help basis:” In short, SHG is a small group of rural poor, who have voluntarily come forward to form a group for improvement of the social and economic status of the members.
Concept of SHGs:
It can be formal (registered) or informal. The concept underlines the principle of, Credit and Self Help. Members of SHG agree to save regularly and contribute to a common fund. The members agree to use this common fund and such other funds (like grants and loans from banks), which they may receive as a group, to give small loans to needy members as per the decision of the group. The group members use wisdom and peer pressure use of credit and timely repayment thereof. In fact, peer pressure has been recognized as an effective substitute for collaterals.
Need of SHG’s: The rural poor are incapacitated due to various reasons, such as; most of them are socially backward, illiterate, with low motivation and poor economic base. Individually, a poor is not only weak in socio-economic term but also lacks access to the knowledge and information, which are the most important components of today‘s development process. However, in a group, they are empowered to overcome many of these weaknesses. Hence, there are needs for SHGs, which in specific terms are as under:-
To mobilize the resources of the individual members for their collective economic development.
To uplift the living conditions of the poor. To create a habit of savings. Utilization of local resources. To mobilize individual skills for group‘s interest. To create awareness about rights. To assist the members financially at the time of need. To identify problems, analyzing and finding solutions in the group. To act as a media for socio-economic development of the village. To develop linkages with institutions of NGOs. To organize training for skill development. To help in recovery of loans. To gain mutual understanding, develop trust and self-confidence.
To build up teamwork.
To develop leadership qualities.
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Structure of SHGs: Size of SHG
The ideal size of an SHG is 10 to 20 members. The disadvantage of having high number is that, members cannot actively participate. Also, legally it is required that an informal group should not be of more than 20 people. The group need not be registered.
Condition required for membership for SHG’s
Members should be between the age group of 21-60 years.
From one family, only one person can become a member of an SHG. (More families can join SHGs this way).
The group normally consists of either only men or only women. Because mixed group it would hindered or obstruct free and frank discussions, or opening of the personal problem.
Women‘s groups are generally found to perform better. (They are better in savings and they usually ensure better end use of loans).
Members should be homogenous i.e. should have the same social and financial background. (Advantage: This makes it easier for the members to interact freely with each other, if members are both from rich as well as poor class, the poor may hardly get an opportunity to express themselves).
Comparative Analysis of Microfinance Services Offered To The Poor
PARAMETER Money Lenders Commercial banks
Govt.Sponsored Programs
Financial Program of MFIS’
Ease of Access High Low Low High Lead time for loans
Low Very high Very High Low-Medium
Repayment terms
Very Short Extreme Long Extreme Long Short
Interest Rates Fixed and Rigid Fixed and easy Fixed and easy Flexible Incentives None None None Repeat and larger
loan Repeat Borrowing
Possible Possible but likely
Possible but likely
Stream credit is assured
Loan Access Procedure
Very quick Extreme time consuming
Extreme time consuming
Simple and quick
Collateral and Demand Promissory Note
Mandatory Required but hypothecation of asset may suffice
Not required although a charge on the assets become automatic
Not required social collateral is used for physical collateral
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Members should be rural poor (By poor one should be guided by the living conditions).
Initially there was a slow progress in the programme up to 1999 as only 32,995 groups were credit linked during the period 1992 to 1999. Since then the programme has been growing rapidly and the number of SHGs financed increased from 81,780 in 1999-2000 to more than 6.20 lakh in 2005-06, 6.87 lakh in 2006-07 and 7.94 lakh in 2007-2008
Growth of linked SHG's in 13 Priority States
State 2003 2004 2005 2006 2007 2008 Assam 3,477 10,706 31,234 56,449 81,454 92,343 Bihar 8,161 16,246 28,015 46,221 72,339 83,776 Chhattisgarh 6,763 9,796 18,569 31,291 41703 49,887 Gujarat 13,875 15,974 24,712 34,160 43,572 51,340 Himachal Pradesh
8,875 13,228 17,798 22,920 27,799 34,087
Jharkhand 7,765 12,647 21,531 30,819 37,317 41,889 Maharashtra 28,065 38,535 71,146 1,31,470 2,25,856 2,49,541 Madhya Pradesh
15,271 27,095 45,105 57,125 70,912 80,136
Orissa 42,272 77,588 1,23,256 1,80,896 2,34,451 2,60,656 Rajasthan 22,742 33,846 60,006 98,171 1,37,837 1,58,690 Uttar Pradesh
53,696 79,210 1,19,648 1,61,911 1,98,587 2,14,578
Uttaranchal 5,853 10,908 14,043 17,588 21,527 23,089 West Bengal 32,647 51,685 92,698 1,36,251 1,81,563 210,689 Total 2,49,462 3,97,464 6,67,761 1,005,272 1,374,917 1,550,701 % increase 59 68 51 37 13
Year wise increase of SHG’s and their finance: Year
No. of SHGs financed during the year (in lakh)
Cumulative no. of SHGs financed (in lakh)
2001-02 1.98 4.61 2002-03 2.56 7.17 2003-04 3.62 10.79 2004-05 5.39 16.18 2005-06 6.20 22.38 2006-07 6.87 29.25 2007-08 7.94 37.67
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Explanation:
From the above figure we can notice the growth of SHG‘s in top 13 states. From 07 to 08 no of SHG‘s i.e. one group of SHG consists 10 to 15 members. We can noticed that the highest percentage increased during the year between 04 -05.Over 90 percent of them women, and the total number of SHG members who have ever benefited from the programme to about 51 million. Since some households have more than one member in the programme, the number of families benefited is slightly smaller than these numbers imply. About half of them are below the poverty line.
“Joint Liability Group (JLG) is a group of individuals coming together to borrow from the financial institution. They share responsibility and stand as guarantee for each other.” The individual wanting loans will have to form into a group where each member will be providing cross guarantee for each other.
Difference between SHGs and JLGs
SHGs (Self Help Groups) JLGs (Joint Liability Groups)
• Minimum 10 members and maximum 20.
• For SHGs meeting is compulsory.
• For SHGs the bank loan is available.. • SHG gets the benefit of the entire government scheme, which is viable for them.
• Minimum 3 members and maximum 5.
• There is no necessary of compulsory meeting for JLGs.
• For JLGs, they get the loan only from MFIs.
• There is no benefit of any government schemes for JLGs.
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How JLGs formed
The JLG has to be formed by the LSA(LIVELIHOOD SERVICE ASSOCIATE):
After the formation, LSA has to carry out at least 2 meetings with the group member in order to explain about BASIX, its product, process and procedure. After the meetings the group should have clear understanding of the following:
�� BASIX branch office and Head Office address and contact numbers. �� Name of the JLG and the Area Manager and Unit head of the concerned branch. �� Clear understanding of Group Liability and role of the Group Leader. �� Product details such as repayment term, daily repayment methodology, membership fee and interest rate.
Before the JLG group formation, LSA has to complete the process of origination to verify the group. Loan process for any particular group can start only after the group verification has been done and group has been approved by the LSA. In case the group is not approved, the verification process is to be redone. After that loan process is to be go further and for this the group documents are again verified by the Field Executive at the time of appraisal.
JLG features:
JLG haves 5-6 members group. The group should be either all male or female only in exception cases can there be a mixed group. Members within a group should have similar turnover/profit and group should be economically homogeneous. The group member should be well known to each other. The group member should have their own business. The groups have shop/ business in the same locality. Lending may start from group size of not less than three members.
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BASIX
BASIX is a livelihood promotion institution established in 1996, working with over a million and a half customers, over 90% being rural poor households and about 10% urban slum dwellers.
BASIX works in 16 states - Andhra Pradesh, Karnataka, Orissa, Jharkhand, Maharashtra, Madhya Pradesh, Tamilnadu, Rajasthan, Bihar, Chattisgarh, West Bengal, Delhi, Uttarakhand, Sikkim, Meghalaya and Assam and over 22,400 villages. It has a staff of over 5,400 of which 80 percent are based in small towns and villages.
BASIX mission is to promote a large number of sustainable livelihoods, including for the rural poor and women, through the provision of financial services and technical assistance in an integrated manner. BASIX will strive to yield a competitive rate of return to its investors so as to be able to access mainstream capital and human resources on a continuous basis.
BASIX strategy is to provide a comprehensive set of livelihood promotion services which inlcude Financial Inclusion Services (FINS), Agricultural / Business Development Services (Ag/BDS) and Institutional Development Services (IDS) to rural poor households under one umbrella.
OUR SERVICES
BASIX strategy is to provide a comprehensive set of livelihood promotion services which inlcude Financial Inclusion Services (FINS), Agricultural / Business Development Services (Ag/BDS) and Institutional Development Services (IDS) to rural poor households under one umbrella.
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The BASIX Livelihood Triad includes the following services.
FINANCIAL INCLUSION SERVICES
(FINS)
Agricultural/Business Development Services
(Ag/BDS)
INSTITUIONAL DEVELOPMENT SERVICES (IDS)
Savings: (Direct and as Business Correspondent
Productivity enhancement through increase in yields or reduction in costs.
Individual level awareness, skill and entrepreneurship development, building solidarity and trust.
Credit: agricultural, allied and non-farm activities; loans for housing, water & sanitation, vocational training
Risk mitigation (other than insurance) – such as livestock vaccination
Formation of groups, federations, co-operatives, mutual benefits, etc., of producers.
Insurance for lives and livelihoods – health, crop, livestock, micro-enterprise assets
Local value addition through processing –such as cotton ginning or milk chilling.
Accounting and management information systems, using IT
Money transfer, for migrant
workers and Micro-pensions
Alternate Market linkages -Input supply, output sales
Building collaborations to
deliver a wide range of services
Warehouse receipts Diversification from farm to allied and non-farm activity
Sector and Policy work –analysis and advocacy for changes/reforms.
The rationale behind the Livelihood Triad strategy is as follows: Micro-credit by itself is helpful for the more enterprising poor people in economically dynamic areas. Less enterprising poor households need to start with savings and insurance before they can benefit from micro-credit, because they need to cope with risk. However, in backward regions, poor people, in addition to microfinance, need a whole range of Agricultural/ Business Development Services (productivity enhancement, risk mitigation, local value addition, and market linkages) need to be provided. To offer these services in a cost-effective manner, it is not possible to work with poor households individually and they need to be organized into groups, informal associations and sometimes cooperatives or producer companies. The formation of such groups and making them function effectively, requires institutional development services. Hence, BASIX adopted the Livelihood Triad strategy.
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Technology Assisted Financial Inclusion by BASIX
BASIX has initiated single-window provision of comprehensive financial services to the poor under the Business Correspondent framework. Due to regulatory restrictions, it was earlier not possible to provide saving and remittance services to poor
Vidhya Samruddhi - An Educational Loan Product :
The primary objective is to enhance human resources by funding higher studies and skill-training to the candidates belonging to rural and semi urban areas, who are economically backward and who do not have formal access to nationalized and private banks. Hence, they are deprived of opportunity that could benefit them and society at large
BASIX Academy :
The primary objective is to enhance human resources by funding higher studies and skill-training to the candidates belonging to rural and semi urban areas, who are economically backward and who do not have formal access to nationalized and private banks. Hence, they are deprived of opportunity that could benefit them and society at large.
Strategy for livelihood promotion:
the Livelihood Triad strategy entails integration of livelihood promotion services with financial services. The BASIX structure has supported considerable experimentation and innovation –both in the design of financialservices (credit and insurance) and in identifying opportunities and solutions for Ag/BDS. As Ag/BDS becomes more integrated with financial service delivery, a challenge will be to ensure livelihood promotion services are effective for different market segments. Currently services are packaged with the financial
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product and are assumed to be required, which is not necessarily the case (e.g. where there is access to NGO dairying support). Reaching services to more remote areas (more difficult, but probably more necessary) will also require a specific strategy.
Staff:
Strong systems for staff training and development. Staff are proud to be a part of BASIX, and see themselves as leaders in livelihood finance. Turnover is nevertheless high, as in other MFIs facing competition for employment largely from the formal banking sector – ‘staffing the sector’ as BASIX sees it.
MIS:
BSFL has a strong computerised MIS with some social profiling (caste and women) based on loan ID. BSFL needs to use a unique client ID for social analysis, (tracking over time, client retention). Analysis of exit or rate of dropout is a gap which BSFL needs to address, allowing for expected periods between loans, especially for seasonal agricultural loans. BSFL may consider including in its MIS other client profile indicators from the loan application form, which are used for credit appraisal but not collated.
Micro credit for water & sanitation - Indian Grameen Services and WaterPartners International (WPI - USA) had entered into an agreement for collaboration in the water credit initiatives of WPI, for providing loans for water and sanitation facilities to households and communities in India through a micro-credit approach. Under this agreement, IGS has accepted in designing a micro credit product for offering to the poor households and pilot the product in three locations in India. These locations are Indore (Madhya Pradesh), Delhi and Ganjam district (Rural) in Orissa state.
This project has the objective of testing the technical and financial feasibility of WatSan loans. A pilot project has been designed by IGS in order to test the new product. As of now, 389 clients have been covered with this loan – the amount disbursed is Rs. 4 million.
SOCIAL PERFORMANCE REPORTING AWARD
BASIX has been recognized globally for its Social Performance! BSFL was granted with the 2009 MFI Gold Certificate Social Performance Reporting Award.
The initiative was launched by CGAP, together with its partners the Michael & Susan Dell Foundation, the Ford Foundation, and the Social Performance Task Force (SPTF). The Award, powered by the MIX, is designed to promote greater transparency in the MFIs’ Social Performance Management and looks at the Social Indicators such as Social Mission and Goals, Social Responsibility, Poverty Assessment, Outreach to Women, Poor and Disadvantaged. The Award was presented and handed over to Rama Kandarpa (Group President OLE) by Kate McKee (Senior Adviser for Policy, Outreach and Aid Effectiveness for CGAP) on October 26th during the Microfinance India Summit at the end of the plenary session on Responsible Lending chaired by Vijay Mahajan.
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VALUES
BASIX is deeply committed to promoting livelihoods for the poor, and have a strong concern for
equity – working with the rural and urban poor sustainability – both financial and institutional for BASIX and also for its customers and
for the environment results – making things happen on the ground as well as scale up directly and indirectly
through influencing others including government policy and programs integrity and dignity – ensuring these for those who we work with and those who work in
BASIX Innovation and learning - devising new ways of doing things and mastering those
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VISION
The logo depicts the vision of BASIX. Inspired by the Yin-Yang duality, the logo has broadly the following meaning.
The circle represents the globe, our mother Earth, half of which is dark blue, representing poor, who are excluded from opportunities for better livelihoods. The white dot in the dark region represents an area of hope, arising from the talents and aspirations of the poor and the efforts of BASIX to promote livelihoods.
The white part is the economically more prosperous world, but colourless, and it can benefit from the vibrancy and talents of the dark blue part. The lines represent BASIX attempts to establish linkages between the two zones. These linkages include capital, human resources, technology, markets, institutions and policies. The environment is represented by the circular boundary, which also depicts the Earth. Anything that we do to enhance prosperity (Samruddhi), has to be sustainable for both zones together.
Our motto, “Equity for Equity” means that BASIX attempts to use capital (financial, human, social and natural capital) to work towards bringing equality of opportunity and social justice in society, globally
Bankers and partners of BASIX
SWISS AGENCY FOR DEVELOPMENT CORPORATION, SWIZERLAND FORD FOUNDATION, USA CORAD, NETHERLAND DEVELOPMENT INTERNATIONAL DESJARDIANS, CANADA WATER PARTNERS INTERNATIONAL, USA AXIS BANK Ltd. S.I.D.B.I. CITIBANK CORPORATION BANK LTD. HOUSING DEVELOPMENT FINANCE CORPORATION HDFC LTD
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Senior management group profile of basix
1. s. ramachandran chief operating officer of bsfl2. d.sattaiah group vice president, hrd3. s.amarnath group vice president, agbds4. rama kandarpa vice president, institutional development services,
basix5. hemanth ku.valveker - chief operating officer6. George v.mathew assistant general manager(operation and hr) inkbs
lab7. Subhash ch. Jindal assistant vice president,
Bhopal8. Sourindra bhattacharjee –9. Suresh ch. Sharama- assistant dean,
liovelihood school10.Vigyan vikram singh- AVP, rajasthan11.p.narsingh12.Rajeev kumar gupta AVP,ids and
policy work13.s.r.suryanarayana AVP, internal audit14.basil liongs AVP, southern ap and
karnatak15.k. venkata rao AVP,livelihood
triad fund16.a gopalkrishna 17.p.d.rai chief of basix operations in north
esast india18.anoop kaul senior advisor,
livelihoods19.mihir sahana-20.b.v. raghuram –21.l.ram mohan rao22.dr. narayana S L23.arijit dutta24.Yves lafond25.Prabhat panda
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Whilst there is reference to the BASIX group, the focus of this rating is Bharatiya Samruddhi Finance Ltd (BSFL) which provides varied credit products, a range of insurance linkages, agriculture/business development services and institutional development services for producer groups and associations. BSFL has expanded operations both in the south, and more recently to the north of the country. As of end March 2007, working in seven States, with 198,300 clients, BSFL is among the ten largest MFIs in India.
Strengths
� Strong spirit of mission across the organisation, and good understanding of the integrated service approach (Livelihood Triad strategy);� Operations primarily in economically backward districts;� Wide range of financial products and services designed to cater to different market segments; regular mechanisms for product testing and market feedback;� Culture of learning and experimentation for both financial and livelihood promotion services and issues, combined with practical and sustainable systems;� Synergies for experimentation in new initiatives and transferwithin the BASIX group.
Issues
� Within an approach which has the broad aim of contributing to development, BSFL may consider more specifically (‘SMARTLY) how inclusive of the poor and of women it aims to be, and who it means by ‘poor’;� No tracking or analysis of exit/dropout;� Ag/BDS services appear supply driven in some areas: how to cater specifically to poorerclients; and focus on areas with greater need (without existing services – as in dairying);� MIS to enable portfolio analysis from social perspective – need to analyse data based on client ID;� Despite fairly transparent systems and written communication, client awareness appears low;
� Internal research needs better coordination and focus.
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NABARD Initiative in Micro Finance Introduction
National Bank for Agriculture and Rural Development (NABARD) was established as an apex rural development bank in the year 1982, through an Act of Parliament, to provide refinance for agriculture, allied activities, small scale industries, cottage and village industries, rural artisans and crafts in an integrated manner. Earlier, RBI and GOI managed the loans and credits for the poor but, these bodies wanted some other body which fully managed this activities i.e. distribution of loans and credits to the poor people. It was set up with an initial capital of Rs 100 crore, which was enhanced to Rs 2,000 crore, fully subscribed by the Government of India and the RBI. The bank's vision is "to facilitate sustained access to financial services for the unreached poor in rural areas through various microfinance innovations in a cost effective and sustainable manner."
Role of NABARD Providing refinance to lending institutions in rural areas.
Bringing about or promoting institutional development.
Evaluating, monitoring and inspecting the client banks.
Besides this pivotal role, NABARD also:
NABARD is an apex institution accredited with all matters concerning policy, planning and operations in the field of credit for agriculture and other economic activities in rural areas.
It is an apex Refinancing agency for the institutions providing investment and production credit for promoting the various developmental activities in rural areas
It prepares, on annual basis, rural credit plans for all districts in the country; these plans form the base for annual credit plans of all rural financial institutions.
It undertakes monitoring and evaluation of projects refinanced by it. It promotes research in the fields of rural banking, agriculture and rural development
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From the above chart we can see the organizational structure of NABARD. In that there are Board of Directors and the Current Chairperson (Ranjana Kumar) and four Executive Directors (V S Das, Prakash Office Bakshi, S K Mitra and). There are 24 Head Office Dept., 8 Training Establishment and 28 Regional Offices and Regional Offices there are Sub Office and 391 District Offices
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Financial Santa Clause (NABARD)
National Bank for Agriculture and Rural Development (NABARD) was established as an apex rural development bank in the year 1982, with the initial capital of Rs 14000 crore, which was provided by the Government of India (GOI) and Reserve bank of India (RBI). And till March 30, 09 it reached to Rs 1, 00,000 crores with the surplus of Rs 1400 crores. NABARD gets fund from the GOI, RBI, Swiss Bank, big NGO‘s etc. NABARD‘s financial position is very robust. Its Reserve and Surplus increased by 10.26% from 07 to 08, and its Cash and Bank balance and Investment increased by 40.16% and 15.5%. So this shows that how well NABARD is managing their funds and how year and year it blossomed.
How NABARD helps Banks and MFI’s in augmenting?
Earlier Banks and MFI‘s both were having different approached to work. If one was moving in right direction then other was in left. So NABARD played a very crucial role to bring them both in the way. Big commercial banks were focused on only large and medium class people where the poor were neglected because of less savings and borrowing capacity. And the on the other hand MFI‘s were focusing on poor women. As there are more Banks then the MFI‘s, so the large chunk of population gets neglected. So the NABARD came into the picture and try to bridge the gap between the two. What are the techniques that NABARD use for the Banks and MFI‘s:-
For banks:
Provide Refinance to the banks.
Conduct the workshop where the executive of the NABARD meet the executive and employees of different banks and help them to understand the need and importance of microcredit to the poor people.
NABARD helps the banks to interface or try to convene the NGO‘s and other institutions with the banks which earlier they were avoiding to meet.
NABARD‘s is having rule for the banks that they have to keep aside a certain amount of loan for the people of Below Poverty Line.
For MFI’s:
NABARD gives loans to the MFI‘s after analyzing there rating and balance sheet.
Conduct the workshop where the executive of the NABARD meet the executive and employees of different Banks and MFI‘s and bring them together on the same podium.
NABARD gives the refinance to the MFI‘s also.
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How NABARD manage their Repayment ratio?
It‘s very interesting o know the repayment structure of the NABARD. NABARD provides the loan to the MFI‘s, Banks, Agriculture loan, other microcredit loan etc. at a very nominal rate of interest and without any deposit of collateral. But their Repayment ratio is more than 95%, let‘s see what are the reasons and how it manage such a high repayment ratio: Before providing loan to the institutions NABARD see the credit rating of that institute given by the rating agency. If they find that sufficient they grant according to that.
NABARD analyze the balance sheet and profit and loss statement of the borrowing institutes.
They (NABARD) sees the past record of the borrowing institutes i.e. there repayment ratio, there schemes, there management and the executives who are working in that institutes.
How NABARD gives loan to the Institutions?
While I was doing survey what I found out that, NABARD follows the very strange way of providing the loans. They give loans to the every ODD number people or institutes i.e.3, 5, 7, 9…. Because there are so many borrowers every day that its difficult to provide to each and every one. So in this way they try to eliminate the overcrowding problem.
Credit institutions as a Political tool : Debt relief in India
Rural financial institutions that are associated with governments often become the target of politicians. Indian Government appointed Agricultural Credit Review Committee in 1989. During the election years, and even at other times, there is a considerable propaganda from political platforms for postponement of loan recovery or pressure on the credit institutions to grant extension or waive of the loans.
The ―willfulǁ defaulters are, in general, socially and politically important people who example others are likely to follow. The waiver of farm loans by the government of India has resulted in increased defaulters.
Paying back the loan is a cultural concept. People borrowing money should feel the strong moral urge to pay the loan back. Loan waivers instead make them feel that if the things go really, really bad, government will step in and cancel the interest payable and even principle also. This will increase the defaulters list because even the decent borrowers default on their loan.
In addition to know lacuna in the operating system for microfinance, the most serious against the success of Microfinance, emerges from political intervention.For example: around the year 1995, at the behest of Mr. Devilal the government of India waived the repayment of agriculture loans, in which the outstanding debit amount was less than Rs 10,000 per loan account. It was noticed in the RBI inspection of some of the District Central Co-
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0perative Banks (DCCBs) during the latter years that hundreds in thousands of defaulters with outstanding Dr Balance in excess of Rs 10,000 were also accommodated by some accounting jugglery. Be whatever it may, such declaration from the government obviously prompts the emergence of willful defaulters.
In other words the farmers, where otherwise having financial means to repay choose the easier path of non repayment. Ultimately it is resulted into mounting NPAs in the balance sheet of the co-operative banks and more seriously dreadful challenge to the functioning of Microfinance.
This sad experience is recently repeated when an enormous package of Rs 60,000 crore is declared by Shri P.Chitambaram and further package of Rs 40,000 crore is also declared by Mr. Rahul Gandhi. This proves that the politicians were in powered have no respect to create and solitude a noble and viable financial system, such as Microfinance.
Such a culture will seriously impact the MFI‘s operating in the rural areas. The farmer, whose agriculture loan from the state owned bank was waived, will have a wife which is the ideal candidate for taking loan from MFI‘s. Now would be her attitude to paying the loan back, when her husband‘s loan get waived by the Government itself? Because of this attitude many MFI‘s reluctant to enter into this sector (Farm loan sector). As long as Government persists, privately funded MFI‘s should never lend any money to the farmers.Indeed the recent waiver packages are declared by the ruling party to enrich the balance their Vote bank account in view of the general elections.Loan waiving policy has any positive impact on distressed farmers who have moneylender debt?
This loan waiver does not directly address moneylender debt, and I saw somewhere that three quarters of the farmers committing suicides owed money to moneylenders. There are about 70% of the poor who still takes the loan from the money lenders and the loan waiving was not for that people who has taken loan from the moneylenders, so there would be not any relief for such farmers, and still the suicides will continue. “I am confused, where is my Microfinance Lost”
Product Design
The starting point is: how do MFIs decide what products to offer? The actual loan products need to be designed according to the demand of the target market. Besides the important question of what risks to cover, organizations also have to decide whether they want to bundle many different benefits into one basket policy, or whether it is more appropriate to keep the product simple. For marketing purposes, MFI‘s sometimes prefer the basket cover, since it can make the policies sound comprehensive, but is that the right approach for the low-income market? After picking products, one must also understand how they are priced. What assumptions do the organizations make with regard to operating costs, risk premiums, and reinsurance, and how did they come to those conclusions? Would their clients be willing to pay more for greater benefits? From price, the logical next set of questions involves efficiency. Indeed, given the relative high costs of delivering large volumes of small policies, maximizing efficiency is a critical strategy to
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ensuring that the products are affordable to the low-income market. One way is to make the products mandatory, which increases volumes, reduces transaction costs and minimizes adverse selection. What does an organization lose by offering mandatory insurance, and how does it overcome the disadvantages? MFI‘s can combine a mandatory product with some voluntary features to make the service more customer-oriented while.
Techniques of Product Design
To design a loan product to meet borrower needs it is important to understand the cash pattern of the borrowers. cash pattern is important so far as they effect the debt capacity of the borrowers.
Lenders must ensure that borrowers have sufficient cash inflow to cover loan payments when they are due\
Efficiency depends less on the delivery model than on the simplicity of the product or product menu.
Simple products work best because they are easier to administer and easier for clients to understand.
Another efficiency strategy is to use technology to reduce paperwork, manual processing and errors.
MFIs need to conduct a costing analysis to determine how much they need to earn in commission to cover their administrative expenses.
How mfi’s manage their repayment and risk management?
Risk is an integral part of financial services. When financial institutions issue loans, there is a risk of borrower default. When banks collect deposits and on-lend them to other clients (i.e. conduct financial intermediation), they put clients‘ savings at risk. Most MFIS‘s provides the loans without or with smaller portion of deposit or, so for them repayment of interest or principal is very risky. All MFI‘s face risks that they must manage efficiently and effectively to be successful. When poorly managed risks begin to result in financial losses, donors, investors, lenders, borrowers and savers tend to lose confidence in the organization and funds begin to dry up. When funds dry up, an MFI is not able to meet its social objective of providing services to the poor and quickly goes out of business.
What is Risk Management?
Risk management is a discipline for dealing with the possibility that some future event will cause harm. It provides strategies, techniques, and an approach to recognizing and confronting any threat faced by an organization in fulfilling its mission. Risk management may be as uncomplicated as asking and answering three basic questions: What can go wrong?
What will we do (both to prevent the harm from occurring and in the aftermath of an "incident")?
If something happens, how will we pay for it?
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Benefit of Risk Management:
Early warning system for potential problems: A systematic process for evaluating and measuring risk identifies problems early on, before they become larger problems or drain management time and resources. Less time fixing problems means more time for production and growth.
Better information on potential consequences, both positive and negative. A proactive and forward-thinking organizational culture will help managers identify and assess new market opportunities, foster continuous improvement of existing operations, and more effectively performance incentives with the organization‘s strategic goals.
Encourages cost-effective decision-making and more efficient use of resources
The Corposol/Finansol Crisis
In 1996, Finansol, a regulated financial intermediary in Columbia, suffered from severe deterioration of its loan portfolio. While a lack of transparent and separate accounting from its parent NGO, Corposol, added to the problem, the MFI‘s rapid growth and poor risk management were initial culprits. In 1995, Finansol‘s microfinance portfolio grew from $11 million to $35 million. Many of the credit officers who delivered this growth were new and not well trained, and were simultaneously responsible for promoting three new untested microfinance products for Corposol. There was no mechanism to prevent clients from receiving multiple loans from the MFI; in fact, many clients had two to three loans outstanding. The new products were mostly unsuccessful and the management information system had difficulty managing the diversity of products. As a temporary measure to reduce the negative impact on the income statement resulting from provisioning, Finansol refinanced loans on a wide scale and extended loan terms. This further concealed Finansol‘s deteriorating asset quality. Under pressure to generate revenue for Corposol, whose operating revenues were heavily dependent on training fees from new clients, loan officers continued to expand their loan portfolios by adding new clients without much regard for credit risk. To circumvent a government policy that limited the asset growth of regulated financial institutions to 2.2 percent per month, Corposol retained a significant portion of Finansol‘s loan portfolio on its balance sheet, which further distorted Finansol‘s financial statements. It wasn‘t until July 1995, when ACCION International conducted a formal evaluation of the entire microfinance operation that the problem came to light. A recapitalization plan called for an end to the relationship between Corposol and Finansol and the recruitment of new investors to raise the level of capital high enough to meet the Superintendence‘s requirements and to fuel future growth. With the assistance of private and non-profit sectors, the recovery plan successfully saw Finansol through its institutional metamorphosis into what is now FINAMERICA, S.A. FINAMERICA began operations in 1997, and as of year-end 1998, it had achieved financial solvency with 9,800 active clients and a loan portfolio of $13.4 million.
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This crisis demonstrates the need to integrate risk management in all an MFI’s activities.
Major Risks to Microfinance Institutions:
Financial risk Operational risk Strategic risk
i. Credit risk
Transaction risk Portfolio risk
ii. Liquidity risk
iii. Market risk
Interest rate risk
Foreign exchange risk
Investment portfolio risk
i. Transaction risk
Human resource risk
Information & technology risk
ii. Fraud(integrity) risk
iii. Legal & compliance risk
i. Governance risk
Ineffective risk
Poor governance risk
ii. Reputation risk
iii. External business risks
Event risk
These are the most significant risks (with the most potentially damaging consequences for the MFI), how they interact, and current challenges faced by MFIs.
Financial Risks:
Most MFIs focus on financial risks, including credit, liquidity, Interest rate, and investment risks. Mentioned under are the risks which are very critical for the MFI‘s.
Credit risk:Credit risk, the most frequently addressed risk for MFIs, is the risk to earnings or capital due to borrowers‘ late and non-payment of loan obligations. Credit risk encompasses both the loss of income resulting from the MFI‘s inability to collect anticipated interest earnings as well as the loss of principle resulting from loan defaults. Credit risk includes both transaction risk and portfolio risk.
Transaction risk: Transaction risk refers to the risk within individual loans. MFIs mitigate transaction risk through borrower screening techniques, underwriting criteria, and quality procedure for loan disbursement, monitoring, and collection.
Portfolio risk:
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Portfolio risk refers to the risk inherent in the composition of the overall loan portfolio. Policies on diversification, maximum loan size, types of loans, and loan structures lessen the portfolio risk.
Liquidity risk:Liquidity risk is the ―risk that an MFI cannot meet its obligations on a timely basisǁ. Liquidity
risk usually arises from management‘s inability to adequately anticipate and plan for changes in funding sources and cash needs. Efficient Liquidity Management requires maintaining sufficient cash reserves on hand (to meet client withdrawals, disburse loans and fund unexpected cash shortages) while also investing as many funds as possible to maximize earnings. Liquidity management is an ongoing effort to strike a balance between having too much cash and too little cash.
Interest rate risk: Interest rate risk is the risk of financial loss from changes in market interest rates. The greatest interest rate risk occurs when the cost of funds goes up faster than the financial institution can or is willing to adjust its lending rates.
How to manage interest rate risk?
To reduce the mismatch between short-term variable rate liabilities and long-term fixed rate loans, managers may refinance some of the short-term borrowings with long-term fixed rate borrowings. This might include offering one and two-year term deposits as a product and borrowing five to 10 year funds from other sources. Such a step reduces interest rate risk and liquidity risk, even if the MFI pays a slightly higher rate on those funding sources.
To boost profitability, MFIs may purposely ―mismatchǁ assets and liabilities in anticipation of changes in interest rates. If the asset liability managers think interest rates will fall in the near future, they may decide to make more long-term loans at existing fixed rates, and shorten the term of the MFI‘s liabilities. By lending long and borrowing short, the MFI can take advantage of the cheaper funding in the future, while locking in the higher interest rates on the asset side. In this case, the MFI has increased the interest rate risk in the hope of improving the profitability of the bank.
Operational Risks:
Operational risk arises from human or computer error within daily service or product delivery. This risk includes the potential that inadequate technology and information systems, operational problems, insufficient human resources, or breaches of integrity (i.e. fraud) will result in unexpected losses.
Two types of operational risk:
Transaction risk and fraud risk:
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Transaction risk: Transaction risk is particularly high for MFIs that handle a high volume of small transactions daily. Since MFIs make many small, short-term loans, this same degree of cross-checking is not cost-effective, so there are more opportunities for error and fraud. As more MFIs offer additional financial products, including savings and insurance, the risks multiply and should be carefully analyzed as MFIs expand those activities
Fraud risk: Fraud risk is the risk of loss of earnings or capital as a result of intentional deception by an employee or client. The most common type of fraud in an MFI is the direct theft of funds by loan officers or other branch staff. Other forms of fraudulent activities include the creation of misleading financial statements, bribes etc.
How to minimize fraud risk?
Introduced an education campaign to encourage clients to speak out against corrupt staff and group leaders.
Standardized all loan policies and procedures so that the staff cannot make any decision outside the regulations.
Established an inspection unit that performs random operational checks.
Strategic Risks:
Strategic risks include internal risks like those from adverse business decisions or improper implementation of those decisions, poor leadership, or ineffective governance and oversight, as well as external risks, such as changes in the business or competitive environment. This section focuses on two critical strategic risks: Governance Risk, Business Environment Risk.
Governance risk:Governance risk is the risk of having an inadequate structure or body to make effective decisions. The Corposol/Finansol crisis, described above illustrates the dangers of poor governance that nearly resulted in the failure of that institution.
External business environment risk: Business environment risk refers to the inherent risks of the MFI‘s business activity and the external business environment. To minimize business risk, the microfinance institution must react to changes in the external business environment to take advantage of opportunities, to respond to competition, and to maintain a good public reputation
Why micro finance provides loan to the women only?
A majority of microfinance programs generally target women—often more financially responsible at repaying than men—as clients, providing them with direct control over resources. Why MFIs typically targeted women. These factors included: Repayment rates are higher than men, so lending to women is a better Investment.
Women are on average poorer than men, so focusing on women can help achieve poverty targets.
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Women‘s activities contribute to a community‘s economic growth, so lending to women is more efficient.
The members in a group are selected so as to be in the same age group and residing in the same locality being friends but not from family. In case of problems in recovery from even one of the members, the system of joint liability ensures recovery of the dues from all the members within a group.
Women are better borrowers because they repay their loans more faithfully than men repay and tend to spend money on improving the standard of living of their family.
It has been proved that women are those who are the most able to manage the money of the household. Experience has shown that women are a good credit risk, and that women invest their income surround the well being of their families.
Women have proven to be the best poverty fighters. Experience and studies have shown that they use the profits from their businesses to send their children to school, improve their families‘ living conditions and nutrition, and expand their businesses.
By providing access to financial services only through women—making women responsible for loans, ensuring repayment through women, maintaining savings accounts for women, providing insurance coverage through women—microfinance programs send a strong message to households as well as to communities.
Why MFI’s being criticized for providing loans to the women only?
It was found that while women were getting the loans, a "significant portion" of those loans are directly invested by male relatives (although women bear the liability for repayment)
Only 37% of the cases had women retained full or significant control over the businesses that were in their names.
Repayment tensions in other microfinance programmes as well. In India in 2008 in the state of Andhra Pradesh, media reports linked to 70 suicide deaths to repayment issues in Grameen type programmes. The same reports also documented techniques forcing credit circle members to stand in the sun until recalcitrant members paid up, verbal abuse etc.
One more reason why MFI‘s critized for giving loans to the women only because, women‘s are weak compared to men‘s and by coerce them the MFI‘s can easily repayment their loans. Another reason might be that the women not often change their whereabouts, because they have the many responsibilities like children etc. and they easily found at home also.
how the recent slowdown affects the mfi’s:
Microfinance institutions have weathered the global financial storm remarkably well, but in 2009 the credit crunch and global recession could hit the sector hard. The micro finance sector is not fully integrated into mainstream banking and so MFIs are partially insulated from financial markets contagion. From the very early of beginnings, the sector has expanded into a global community of over 3000 MFIs serving 125 to 150 million customers in developing countries with 25 to 30 billion dollars in loans. The industry has consequently attracted mainstream banks like Citigroup, Standard Chartered, and BNP Paribas. SKS Microfinance, India's largest MFI, recently raised about 75 million dollars from private equity sources. The most immediate worry
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is that the global credit crunch will affect the cost and availability of funding. The most vulnerable MFIs will be those that get their money from foreign banks. Credit is now tighter, slower, and more costly. As financial institutions are struggling with their liquidity, they have less money to lend to microfinance institutions, which in turn means less to lend to the poor, and lending happens then at the higher rate. Current slowdown also increases the rate of interest on borrowed sum, this further increases the funding loan of the MFI‘s and the poor people whotakes loan from the MFI‘s, would find it difficult to borrow and this further increases the more people Below Poverty Line (BPL) Microfinance institutions generate capital from three main sources: debt, deposits, and equity. And during the recession all this sources of finance gets expensive. We will see one by one.
Deposits:
Many MFI‘s main source of capital is from deposits, and this is the easiest source of capital but during the recession, local currencies in developing countries lose value, clients will find it increasingly difficult to maintain savings levels. Deposits may decline and non-performing loans may increase as clients require additional capital to cover basic needs.
Debt –based MFI’s:
MFIs that depend upon this source of capital at greatest risk during the financial crisis. In today‘s economy debt financing is offered at a high rate of interest and during slow down the demand from the investors get reduced and the MFI‘s have the fixed obligation to pay interest. So this creates the difficulty for the MFI‘s and for borrowers during the time of slowdown.
Equity based financing:
This source of finance is not very popular in India. Because this needs a huge capital and many MFI‘s in India are not
Many microfinance banks are not disturbed by the global happenings due to, the fact that they all have high savings- and deposit this leads to less dependence on government, bank and external funding. But even savings-led institutions are not immune to a global economic crisis. MFI managers now report that high prices for food and fuel, a lack of demand for microenterprise products and decrease in the incomes of the earning members are hurting their clients. More and more clients withdraw their savings or have trouble repaying their loans.
How the MFI’s find opportunities within the crisis:
MFIs could also find opportunities within the crisis. Microfinance‘s relatively reliable business model could attract investors looking to spread risks and diversify their portfolios.
The downturn could also force MFIs to grow less aggressively and focus on consumer protection, transparency, and governance.
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More commercialization by the MFI‘s can also create situation of subprime style crisis. So the slowdown would slow down the commercialization and helpful for the local borrowers.
One more solution to solve the money problem of MFI‘s might be, to turn MFI‘s into bank, this can solve their liquidity problem by taking deposits and lending money.
MFI’s being criticized because of high interest rate:
Most MFI‘s financially sustainable by charging interest rates that are high enough to cover all their costs. The problem is that the administrative costs are inevitably higher for tiny micro lending than for normal bank lending. Lending out a million dollars in 100,000 loans of $100 each will obviously require a lot more in staff salaries than making a single loan for the total amount. As a result, interest rates in sustainable microfinance institutions (MFIs) are substantially higher than the rates charged on normal bank loans. Four key factors determine these rates: 1. the cost of funds, 2. the MFI's operating expenses, 3. loan losses, 4. and profits needed to expand their capital base and fund expected future growth.
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 percent, and it experiences defaults of 1 percent 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 11percent 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. 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 percent. 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 percent. Formula to decide the interest rate is: R = AE + LL + CF + K - II 1 – LL Where AE is administrative expenses, LL is loan losses, CF is the cost of funds, K is the desired capitalization rate and II is investment income.
Why Microcredit Rates are so high?
An MFI's main objective is to provide poor and low-income households with an affordable source of financial services. Interest charged on loans is the main source of income for these institutions and, because they incur huge costs, the rates are correspondingly high. Many policy makers question why microfinance interest rates remain high even when MFIs receive concessional funds to finance lending. Donors provide concessional funds for a 60 particular usage only for a limited period, as do some governments. However, concessional funds cannot be considered a permanent source of funds for MFIs, and provision must be made through interest rates to sustain the lenders' operations. The problem is that the administrative costs are
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inevitably higher for tiny microlending than for normal bank lending. Lending out a million dollars in 100,000 loans of $100 each will obviously require a lot more in staff salaries than making a single loan for the total amount. As a result, interest rates in sustainable microfinance institutions (MFIs) are substantially higher than the rates charged on normal bank loans. Inflation adds to the cost of microfinance funds by eroding micro lenders' equity. Thus, higher inflation rates contribute to higher nominal microcredit interest rates through their effect on the real value of equity. Most of the Micro lenders face two kinds of operating costs: personnel and administrative. Because micro lending is still a labor-intensive operation, personnel costs are high. Administrative costs consist mainly of rent, utility charges, transport, office supplies, and depreciation of fixed assets. Making and recovering small loans is costly on a per unit basis. Often loan recovery is executed by staffs who visit clients, increasing costs in time taken and transportation used. Poor physical infrastructure—inadequate road networks, transportation, and telecommunication systems— in many countries in which micro lenders operate also increases administrative costs and adds significantly to the cost of microfinance operations. In many countries in the region, the majority of microcredit is provided by a few leading institutions, and competition among them is mostly on non-price terms. Large-scale commercial banks with access to low-cost funds, low operating costs, extensive branch networks, and vast human and other resources to provide financial services efficiently are presently not significantly involved in microcredit. The lack of participation of such conventional financial institutions in the microcredit market also limits potential competition. This does not mean that all high interest charges by MFIs are justifiable. Sometimes MFIs are not aggressive enough in containing transaction costs. The result is that they pass on unnecessarily high transaction costs to their borrowers. Sustainability should be pursued by cutting costs as much as possible, not just by raising interest rates to whatever the market will bear.
Inappropriate Comparisons
Microcredit interest rates are often compared with those charged by both commercial banks and excessively subsidized lending organizations. Such comparisons are inappropriate. Commercialbanks most often deal with large loans, and their transaction costs are lower than those of MFIs on a per unit basis. Thus, commercial banks are able to charge lower interest rates than MFIs. A financial institution receiving large subsidies may charge lower interest rates than other MFIs. In Bangladesh, the Grameen Bank charges an annual interest rate of 20% (on a reducing-balance basis) on its main credit product. Because this rate was below cost recovery levels, the Grameen Bank incurred losses for many years, and these losses were underwritten by the big subsidies it received. Thus, Grameen Bank's interest rates should not be compared with those of an MFI that has not received similar subsidies. Other inappropriate comparisons of MFI interest rates include those charged by government-owned MFIs or government-sponsored microfinance programs that are often compelled to charge lower-than-cost-recovery interest rates based on political considerations. These comparisons also overlook that most of these programs and institutions in general are unlikely to survive in the long term to serve the poor. Moreover, the poor have to incur unusually high transaction costs to access credit from these sources due to credit rationing systems and rent-seeking practices adopted by their employees.
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Rate Ceilings: Not the Answer -
Lower microcredit interest rates will help increase of availability of affordable finance for poor households."Policymaker concern over high interest rates has led many to suggest capping interest rate by setting rate ceilings. Yet that this is not an appropriate solution, explaining "Rate ceilings will diminishing the growth of the MFI industry and result in reducing the supply of microcredit and other financial services, harming rather than helping poor and low income households." If rates are set to a level less than that required to cover costs, lenders will incur losses. Not only will this hurt MFIs‘ ability to expand operations, but it will also reduce their creditworthiness and ability to borrow. If a rate ceiling is imposed on a state-owned institution, government will have to provide funds to cover the resulting losses. If the lenders mobilize deposit, microcredit interest rate ceilings may decrease the saving with MFI‘s, because ceilings depress the profitability and viability of MFIs, savers may be reluctant to place deposits in them. This further increases the funding problem while curtailing a valuable service in demand from poor and needy clients.
General Impact of Ceilings on Microcredit Interest Rates
The Demand Side Short-Term • Demand for loans increases at the ceiling rate. • Some new potential clients seek loans at the new rates. • An excess demand for loans created at the ceiling rate. • Price of credit to some of those who actually get loans reduced. • Some borrowers pay higher transaction costs than before. The Supply Side The Demand Side Short-Term Short-Term • Lenders compelled to reduce their Lending Rates. • Excess demand creates incentives for Rent-seeking among lending staff. • lending to the poor Reduced. • Lenders' profits on loans to the poor Reduced. • Incentives make by the MFI‘s on loans to the poor Reduced. • Incentives to increase investments to expand loans to the poor reduced. • Policy risk on lending to the poor increased (threat of new ceilings). •A negative signal sent to potential Investors. • Risk of lending to micro lenders Increased. • Incentives to commercial banks to enter the microcredit market reduced.
SWOT Analysis of micro finance SWOT stands for Strength, Weakness, Opportunity, and Threat.
Strength
• Helped in reducing the poverty: The main aim of Micro Finance is to provide the loan to the individuals who are below the poverty line and cannot able to access from the commercial banks. As we know that Indian, more than 350 million people in India are below the poverty and for them the Micro Finance is more than the life. By providing small loans to this people Micro finance helps in reducing the poverty.
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• Huge networking available: For MFIs and for borrower, both the huge network is there. In India there are many more than 350 million who are below the poverty line, so for MFIs there is a huge demand and network of people. And for borrower there are many small and medium size MFIs are available in even remote areas.
Weakness
• Not properly regulated: In India the Rules and Regulation of Micro Finance Institutions are not regulated properly. In the absent of the rules and regulation there would be high case of credit risk and defaults. In the shed of the proper rules and regulation the Micro finance can function properly and efficiently.
• High number of people access to informal sources: According to the World Bank report 80% of the Indian poor can‘t access to formal source and therefore they depend on the informal sources for their borrowing and that informal charges 40 to 120% p.a.
• Concentrating on few people only: India is considered as the second fastest developing country after China, with GDP over 8.5% from the past 5 years. But this all interesting figures are just because of few people. India‘s 70% of the population lives in rural area, and that portion is not fully touched.
Opportunity
• Huge demand and supply gap: There is a huge demand and supply gap among the borrowers and issuers. In India around 350 million of the people are poor and only few MFIs there to serving them. There is huge opportunity for the MFIs to serve the poor people and increase their living standard. The annual demand of Micro loans is nearly Rs 60,000 crore and only 5456 crore are disbursed to the borrower.( April 09)
• Employment Opportunity: Micro Finance helps the poor people by not only providing them with loan but also helps them in their business, educate them and their children etc. So in this Micro Finance helping in increase the employment opportunity for them and for the society.
• Huge Untapped Market: India‘s total population is more than 1000 million and out of 350 million is living below poverty line. So there is a huge opportunity for the MFIs to meet the demand of that unserved customers and Micro Finance should not leave any stones unturned to grab the untapped market.
• Opportunity for Pvt. Banks: Many Pvt. Banks are shying away from to serve the people are unable to access big loans, because of the high intervention of the Govt. but the door open for the Pvt. Players to get entry and with flexible rules Pvt. Banks are attracting towards this segment.
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Threats
• High Competition: This is a serious threat for the Micro Finance industry, because as the more players will come in the market, their competition will rise , and we know that the MFIs has the high transaction cost and after entrant of the new players there transaction cost will rise further, so this would be serious threat.
• Neophyte Industry: Basically Micro Finance is not a new concept in India, but that was all by informal sources. But the formal source of finance through Micro Finance is novice, and the rules are also not properly placed for it.
• Over involvement of Govt.: This is the biggest that threat that many MFIs are facing. Because the excess of anything is injurious, so in the same way the excess involvement of Govt. is a serious threat for the MFIs. Excess involvement definition is like waive of loans, make new rules for their personal benefit etc.
Interview of end users During my personal visit to MFIs I asked view questions from the end users (customers) of Microfinance institute. I have taken interview of 25 people and I asked few questions to them. Which are mentioned under:-
Q.1 Are you regular or new customer? Q.2 If you are a Regular customer, then can you please tell me your experience? Q.3 What‘s your opinion on interest rates?Q.4 What you do with that loan amount? Q.5 Does the Microfinance Institutions provide you any type of other benefits other than just loan?Q.6 According to you which is better, loan from local Zamidars or with MFIs? Q.7 Have you ever faced any violation on you, if you could not able to repay the loan amount?
The common replies are mentioned under:
Ans.1 Many of the customers are regular and take loan frequently.
Ans. 2 This was the best part and I enjoyed and felt good after hearing their answers. I was amazed that, how can a mere amount of loan can change the life of the people. I got many
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answers on experiences but the best experience I want to share in this report. There was a woman; her name was Chandrika Ben Jadwa. I asked her to share her experience before and after the loan taken from MFIs. She was widow, with 2 daughters. After her husband‘s death she had taken mere Rs 3000 loan from the MFI and purchased Sewing machine, at that time her daughter was 13 years old. And now her daughters‘ age is 23. She came with her daughter, her name was Jaya and when I asked Jaya that what she is doing. I was perplexed by her reply. She replied me in English, and told that she worked in Baroda at call centre. She was so confident, that I couldn‘t believe that time. Her mother told that she educated Jaya till 11th at Village schools and after that she sent her at Baroda for further studies and due to Micro loans, she could able to pay her tuition fees. From that point I realized that what is the power of Micro loans and how it canchange the life of the individuals. Other experience like increase the living standard of the poor, improve in health condition etc.
Ans. 3 When I asked them about the interest rate. Then I got the mixed answer. Some said that rates are high and some said that it is nominal. But one common answer that I found out that the repayment terms is fair and one can easily understand. Most of the MFIs charges weekly interest rate, so they said that it is easy to repay them on weekly basis.
Ans.4 Most of the Micro credit borrower uses there loan amount: Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding,
widowhood, old age. Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or
death. Investment Opportunities: expanding a business, buying land or equipment, improving
housing, securing a job (which often requires paying a large bribe), etc.
When I got this type of reply I thought that the villagers and poor people can also manage the funds as compared to an urban people.
Ans.5 Interviewer answered, that apart from loan amount MFIs helped them many ways like: health facility, student education, teach them, help them in their business, take care of their cattle health, sanitation etc.
Ans.6 When I asked this question, 22 people were voted for MFIs and remaining 3 for local Zamidars. I further asked to that 3 person that why they opted for Zamidars. They replied that there terms and conditions are much flexible compared to MFIs i.e. they can give interest on any date. That is after 1 month, 2 month like that, there is not any uniformity in repayment. Other answer that I got from them that because of the good relation with the Zamidars they preferred to borrow from them. And the Zamidars charges low rate of interest compared to MFIs. But many borrowers opted for MFIs because of less rigorous repayment terms and method. Many additional benefits are given like education, health advice etc. to the borrowers apart from loan amount.
Ans. 7 There are some cases of violation on the borrowers for not repayment of the interest and loan amount. One incident discussed with me by the villagers that, there was woman, her name was Sukhi Devi . She took loan of Rs.10,000 from one of the MFI on a condition of
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repay 20% annually, but she defaulted and was not able to repay. Actually that loan amount was taken by her husband, and he died. So she was not able to repay. And the MFI adopted forceful way to regain their loan amount, and they forced her so much that after sometime she committed suicide. So according to them (end users) there was only one case where MFI used this forceful way to regain their amount.
Future of Micro Finance
Microfinance expansion over the next decade can be expected to be an extension of what has been achieved so far while overcoming the hurdles that have been posing difficulty in effective microfinance operation and its expansion. There may be several participants in this process and their participation may be seen in the following forms. Existing microfinance institutions can expand their operations to areas where there are no microfinance programs. More NGOs can incorporate microfinance as one of their programs.
In places where there are less micro finance institutions, the government channels at the grassroots level may be used to serve the poor with microfinance.
Postal savings banks may participate more not only in mobilizing deposits but also in providing loans to the poor and on lending funds to the MFIs. More commercial banks may participate both in microfinance wholesale and retailing. They many have separate staff and windows to serve the poor without collateral.
International NGOs and agencies may develop or may help develop microfinance programs in areas or countries where micro financing is not a very familiar concept in reducing poverty.
Considering that the majority of the 360 million poor households (urban and rural) lack access to formal financial services, the numbers of customers to be reached, and the variety and quantum of services to be provided are really large. It is estimated that 90 million farm holdings, 30 million non-agricultural enterprises and 50 million landless households in India collectively need approx US$30 billion credit annually. This is about 5% of India's GDP and does not seem an unreasonable estimate. However, 80% of the financial sector is still controlled by public sector institutions. Competition, consolidation and convergence are all being discussed to improve efficiency and outreach but significant opposition remains. Many private and foreign banks have unveiled their plans to enter the Indian microfinance sector because of its very low NPAs and high repayment rate of more than 95% in spite of offering loans without any collateral security. Microfinance is not yet at the centre stage of the Indian financial sector. The knowledge, capital and technology to address these challenges however now exist in India, although they are not yet fully aligned. With a more enabling environment and surge in economic growth, the next few years promise to be exciting for the delivery of financial services to poor people in India
Development of Small-Scale Enterprises through microfinance will not only increase the outreach but will also help the generation of more employment and income for the poor. It is expected that in the following years there will be considerable deepening of microfinance in this direction along with simultaneous drives to reach and serve the poorest of the poor. But the crux of the discussion is that, if the over excess involvement of the government would be there in the Micro Finance sector, than the growth of the Micro Finance won‘t much possible. The Govt.
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involvement should limited to the important decisions only, but not to interfere in each and every matter of the management.
Recommendations and suggestions -
1. The concept of Micro Finance is still new in India. Not many people are aware the Micro Finance Industry. So apart from Government programmes, we the people should stand and create the awareness about the Micro Finance.
2. There are many people who are still below the poverty line, so there is a huge demand for MFIs in India with proper rules and regulations.
3. There is huge demand and supply gap, in money demand by the poor and supply by the MFIs. So there need to be an activate participation by the Pvt. Sector in this Industry.
4. One strict recommendation is that there should not over involvement of the Government in MFIs. Because it will stymie the growth and prevent the others MFIs to enter.
5. According to me the Micro Loan should be given to the women only. Because by this only, MFIs can maintain their repayment ratio high, without any collaterals.
6. Many people say that the interest rate charge by the MFIs is very high and there should be compelled cap on it. But what I felt during my personal survey, that the high rates are justifiable. Now by this example we will get agree.
Suppose a big commercial bank gives Rs 1 million to an individual and in the same way a MFI gives Rs 100 to 10.000 customers. So its obvious that man power cost and operating cost are higher for the MFIs. So according to me rates are justifiable. But with limitations.
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Conclusion
At the end I would conclude that, Micro Finance Industry has the huge potential to grow in
future, if this industry grows then one day we‘ll all see the new face of India, both in term of
high living standard and happiness. One solution by which we all can help the poor people, i.e. in
a whole year a medium and a rich class people spends more than Rs 10,000 on them without any
good reason. Instead of that, by keeping just mereRs, 3000 aside and donate that amount to the
MFIs, then at the end of the year the total amount in the hands of poor would be ( average 500
million people *Rs 3000)=Rs 1,500,000,000,000 . Just imagine where would be India in next 10
years.