Workshop on Microfinance - A Holistic Perspective at JIMS Campus conducted by E Cell members on 18th August 2012.

1. A Primer to Microfinance

2. ―Dhobis (washermen), tailors and barbers contribute more to the GDP of
Andhra Pradesh than the IT sector.‖
(Vikram Akula, SKS; Source CSO, 2004-05)

3. Indian Profile
 Estimated that 32.7% people live  Only about 5 % of rural poor have
Below Poverty Line in India access to microfinance.
 Annual credit demand by the poor  The active borrowers are estimated
in the country is estimated to be to have a per capita outstanding of
about $ 15 Bn. only Rs. 2500.
 India: Market size estimated at $16-  While 10 % lending to weaker
22 bn sections is required for commercial
 India: >33 mn HHs banks, they neither have the
 India: >3000 MFIs network for lending and
supervision on a large scale nor the
 Only 1% of providers WW fully confidence to offer term loans to
financially self-sustaining big MFIs.
 The non poor comprise of 29 %
of the outreach.

4. At the Roots
The poor use finance for Growth and Survival
 Growth (60%)
• Enterprise (30%)
• Buildup assets: education, home (30%)
 Sustenance (40%)
• Fulfill basic consumption
• Protect against shocks
• Access lump sums for lifecycle needs
(Survey of Low Income & LMI urban and rural HouseHolds)

5. Financing Needs of the Poor
Financial Plans of Poor Households
 Cost of burials, health care, replacement costs after natural disasters – Insurance Plans
 Retirements, Migrations, Agri / Farm Equipment, housing upgrades – Pension Plans /
Long Term Deposits
 Irrigation, transportation, livestock, microenterprises, education – medium term
deposits
 Food security, health, festivals, social obligations, emergencies – short term deposits
 Sending money home, microenterprise, working capital – fund transfers and cheques
 Urgent family disasters like sickness / crop failure, payoffs – emergency loans
 Microenterprise, working capital, livestock, equipment and machinery – short term
loans
 Housing, wells, irrigation systems, heavier machinery – longer term loans

6. Managing Savings
Put aside as much money as Take a large sum as an
possible till you save a large advance and repay it
enough sum.
through a series of savings.

7. At the Roots..
… but the poor face very high prices for finance.
They Need There have
 Simple process  No ‗acceptable‘ collateral/ surety
 Door Step Banking  No unique ID
 Flexible Timings  No record of previous
 Timely Availability borrowings/ repayments
 Minimum Documentation  Irregular income flows
 Low literacy

8. At the Roots…
So the poor turn to a variety of old and new
providers to fill the gap…
Banks, Insurance Microfinance Employers, relatives, Moneylenders,
cos Institutions neighbors. friends pvt financiers
18% 37% 16% 4% 26%
Formal Semi – Formal Informal 1-on-1 Informal 1-on-1 impersonal
personal
Informal mutual
Microfinance targets urban and rural low-income (<$2000 (Chit funds )
annual HH income) clients
Uses joint-liability social contracts
Provides affordable finance Survey of 64 LI & LMI urban and rural HHs

9. Societal Exclusion in India
It has meant historically  Overcoming Exclusion
• Community Mobilization
that several communities  The role of the State?
are unable to participate  Partnerships needed between State
and Civil society institutions?
effectively in the process of • Capacity Building
development, economically,  Integrate rights and development
interventions
socially and politically. • Networking, Justice Delivery
Mechanisms and Advocacy
 voice in decision making
 Government Partnership
• Convergence
 Across traditional divides
(rights/development, urban/rural,
national/local, genders)

10. Current Status
 Limited access to Capacity Building support which is an important variable in
terms of quality of the portfolio, MIS, and the sustainability of operations.
 About 56 % of the poor still borrow from informal sources.
 70 % of the rural poor do not have a deposit account
 87 % have no access to credit from formal sources.
 Less than 15 % of the households have any kind of insurance.
 Negligible numbers have access to health insurance and crop insurance 1 %.

11. Introduction to mF
Supply of Formal Financial Services in  Access to Financial Services is the
India major constraint for the poor.
 An estimated demand for credit
ranging from $3-$9 Bn Annually
 The Poor may use a variety of
 Formal Sector capability - $200-300
Mn.
Financial Services if they manage
to save.
 More than 6 Lac Villages
 About 30 K Bank Branches  Micro Credit is not the only
requirement of the poor – they
 Multiple Investment options for the
need more services.
Poor.
 Basic Financial Services still beyond
reach.

12. Microfinance: what is it?
What it often is What it really should be
 Micro-credit  Range of financial services
 Group lending  Group and individual lending
 Social/charitable activity  Profitable activity

13. Microfinance in India
 About 60 % of the MFIs are  Annual growth rate of about 20 %
registered as societies. during the next five years.
 About 20 % are Trusts  75 % of the total poor households
 About 65 % of the MFIs follow of 80 million (i.e. about 60 million
the operating model of SHGs. will be reached in the next five
 Large concentration in South India years.
 600 MFI initiatives have a  The loan outstanding will
cumulative outreach of 1.25 crore consequently grow from the
poor hoseholds present level of about 1600 crores
to about 42000 crores.
 NABARD‘s bank linkage program
has cumulatively reached a total of
9.4 lakh SHGs with about 1.4 crore
households.

14. Microfinance Landscape
Niche Market MFIs Spandan, SHARE Microfin, SKS Microfinance have scaled microfinance reach
Expanding financial services. Multi pronged approach – directly providing
Private Banks (ICICI) credit facilities to SHGs and wholesale credit facilities to microfinance NGOs
and NBFCs.
State Owned /
SBI, SyndicateBank, Andhra Bank, Indian Bank.
Commercial Banks
Microfinance Development Strategy to ensure permanent access to institutional
ADB
financial services for the poor.
PE Firms Investing in low profile MFIs.
NABARD & SIDBI Perform a regulatory and promotional role.

15. Microfinancing
Individualistic Cooperation
Directly People’s Indirectly Institutions Solidarity group
Participation
Money Others Grameen Common Goal Joint
Lenders Group Group Liability
Group
Self Help Cooperatives
Groups
Cluster
Federation

16. Models of Micro Finance
 Self Help Group (SHG)  Grameen Model (GM)
• Dominant microfinance methodology • Initially promoted by the Grameen Bank of
in India Bangladesh
• A version of the village banking model • Grameen MFIs undertake individual lending
• Savings precede borrowings by but all borrowers are members of a 5 member
members joint liability group which in turn gets together
with 6-9 other such groups from the same
village or neighborhood to form a centre.
 Individual Banking (IB)
• Within each centre, peer pressure and the
• Entails provisions of financial services desire to maintain credit – worthiness in order
to individual clients. to qualify for a larger loan in the next cycle are
• Sometimes organised into joint liability key factors which ensure repayment.
groups, co-operative or even SHGs  Mixed Model (MM)
• Creditworthiness and loan security are • MFIs starting with the Grameen Model and then at a
a function of co-operative membership later stage embraced the SHG Model without
completely doing away with the Grameen Model.

17. Microfinancing Systems
 Informal financial service  NGOs
providers • They have proven very
• Moneylenders, pawnbrokers, innovative, pioneering banking
savings collectors, money- techniques like solidarity
guards, input supply shops etc. lending, village banking and
mobile banking that have
overcome barriers to serving
 Member-owned poor populations.
organizations  Formal financial institutions
• self-help groups, credit unions,
and a variety of hybrid
organizations like 'financial
service associations' and
CVECAs

18. Delivery Models
Self Help Groups MFI / Grameen Replica
 Home grown, co-operative  Group lending and regimented
 Savings Based / Led  Focused on self – sufficiency
 Meeting Diverse Needs  NGO – MFI and NBFC – MFI
 Promoted by NABARD, PSU Banks, NGOs  Major Concern – Pace of growth
 Performance - Mixed
Grameen II Wholesome Microfinance Services
 Individual Lending  Regulation
 NBFC – MFI  Specialized activities
 Progressive Loan focused on enterprise  Major Concern – High Cost
 Futuristic products

19. Financing Models
Direct Financing Model SHG-Bank Linkage Model
 Most MFIs use groups as intermediaries for  NGO to act as facilitator/financial intermediary
transactions. between bank and SHG.
 The NGO Promotes, trains and forms SHGs  Intermediation cost of around 6% of loan
 SHGs are formed either by banks or by NGOs amount
and formal agencies but are financed by banks.  Cost is borne by the bank and Risk lies with the
banks as advances are reflected in bank portfolios.

20. Bank Partnership Model
Loan at 9%
Joint Liability
Bank MFI
Group
Interest
charged:
Servicing 20%
FLDG of fees of 11%
10%
MFIs can also be given long term financing by
Banks
Lack of trained staff still affects this model

21. Self Help Groups (SHGs)
 Group of 10 people, create pool  Greater access to credit
of resources  Individuals learn to save
 Advance loans to each other from  NGOs act as facilitator
pool (without collateral)  Again, recovery is high because of
 Loans recovered due to peer group responsibility
pressure and group responsibility  Issues
 SHG deposits resources with bank • Limited ―products‖ offered
 Bank provides advances against • Scale-up of SHGs requires
such deposits government support
 Lower transaction cost for banks • Government involvement prone to
due to group dealing politicize movement; must be
guarded against
 Lower transaction cost for banks
due to group dealing • NGO involvement not sustainable
in long run

22. Basic SHG Functions
 Savings and Thrift  Internal lending
• The amount may be small, but • The savings to be used as loans for
savings have to be a regular and members.
continuous habit with all the
• The purpose, amount, rate of
members.
interest, etc., to be decided by the
• ‗Savings first — Credit later‘ group itself.
• Group members learn how to • Proper accounts to be kept by the
handle large amounts of cash SHG.
through savings. This is useful
• Opening savings bank account
when they use bank loans.
with bank.
 Discussing problems • Enabling SHG members to obtain
• Every meeting, the group will loans from banks, and repaying the
discuss and try to find solutions to same.
the problems

23. Unscalable Bank-SHG Model
Existing Branches New Branches
 Limited outreach  High infrastructure costs
 Concentrated in urban  High operating
areas overheads
 High cost low ticket  Long gestation period
items  Low technology usage in
 Cash intensive rural areas
transaction

24. Characteristic Services
Activity RoE RoIC Net A
Vegetable Vending 50 57
General Store 14 29
Trade
Sweet Making Shop 145 147
Ice Cream Making 13 29
Leasing Mango Trees 184 185
Agriculture
Leasing irrigated farm land 160 161
Operating a Flour Mill 52 59
Services Tailoring 121 123
Roadside Micro-diner 245 246
Goat Rearing 58 65
Livestock
Buffalo Rearing 69 75
 Majority of women Production Pottery 235 236
 Face exclusion from formal institutions
 Poor clients with relatively stable sources of income
 Majority borrow for trading, working capital or setting up business.
 Activities in rural areas - farming, food processing, petty trade, livestock, vending and
production like pottery or basket weaving.
 Activities in urban areas – shops, services, street vendors and new age businesses
(beauty parlor, photography)

25. Usual Lending Process
Geo Economic Based on geo economic information of the district or mandal and the constituent
Survey towns and villages, the MFIs approach favourable villages
Village Appraisal MFI gathers first hand information about the population of the village, their
religion, cast, type of trades, skills, financial states, needs etc.
Village Selection Survey to evaluate potentiality for village operations. Data like total population,
poverty level, accessibility, political stability and safety etc. gathered.
Group Formation Interested people or women form self selected 4-6 member groups to serve as
guarantors for each other.
Training After meeting basic requirements, compulsory group training is done to educate the
Borrowers clients on the processes and procedures to build adequate credit discipline.
Scrutiny and Customer Details, their business, earning capacity etc are closely scrutinized and
Underwriting judged to access their repaying capacity.
Financial The collection meeting are held on a weekly/monthly basis by appointed Field
Transactions Assistants to conduct financial transaction and discuss new applications and issues.
Insurance (Near Insurance products are sold to cover death, accident or health of a group member
Mandatory) of the member‘s dependent's.

26. Business Strategies of MFIs
 Geographical Expansion
 Incorporation of Global Best Practices
 Higher Technology Utilization
 Social Services and initiatives
 Leveraging Finance
 Human Resource Capacity Building
 Greater Portfolio of Financial Services

27. Business Strategies of Banks
Identification, training and promotion of mF clients by MFIs. Bank finances client
Partnership Model
on MFIs recommendation. Customer and Portfolio rests in the bank‘s books.
MFI Portfolio Bank buys portfolios from MFIs. MFI continues to service clients and acts as the
Securitization collection agent. MFI shares credit risk with banks.
Adoption of a core banking system for managing loan portfolios generated inder
Technology
the partnership model
Credit to MFIs / Wholesale linkage model implying extending a bulk loan to the MFIs for lending to
NGOs poor women.
Loan Portfolio Involvement in providing mentoring services to clients including in areas of
Evaluation governance and credit discipline.
Operating divisions at the regional and branch levels in close coordination with
Liaisons with NGOs
local NGOs to generate movement.
High transaction costs, poor outreach and unavailability of quality manpower has obliged banks to adapt
various approaches to fulfill priority sector lending norms.

28. Growth Drivers
Need for Credit by Lack of Lending from Banks due to lack of collateral and exploitation from money
the Unpriveledged lenders has exemplified the potential demand and prospects for the sector.
Increase in the Commercial debt and equity, grants and donations, PE, VC Funding. The capital
sources of Finance structure of the industry is changing for the better.
Diversification of Lender base, consolidating internal controls, strengthening
Innovation
policies on compliance and disclosures.
Government Policy Microfinance Bill, NABARD, SIDBI and RBI have recognized the sector as the
and Support need of the hour.
Industry Increase in number of partners enabling a diversification of the existing product
Consolidation portfolio.
Migration and Use of smart cards, wireless connectivity along with higher loan size increasing
Urbanization penetration of urban micro-financing.
Human Resources The sector is slowly attracting specialized talent for growth.

29. LEGAL EVOLUTION

30. Legal Evolution
 Legal framework for establishing the co-operative movement set
up in 1904.
 Reserve Bank of India Act, 1934 provided for the establishment
of the Agricultural Credit Department.
 Nationalisation of banks in 1969
 Regional Rural Banks created in 1975.
 NABARD established as an apex agency for rural finance in
1982.
 Passing of Mutually Aided Co-op. Act in AP in 1995.
 Microfinance Bill 2012

31. Legal Structures
 SHGs and federations  Public and private sector banks
 Societies and Trusts  Companies incorporated under
Section 25 of the Companies Act
 Co-operative societies
 Companies registered with the RBI
 Co-operative Banks as NBFCs
 Regional Rural Banks  Eligible organizations under
BC/BF guidelines of RBI
 Local Area Banks

32. SHGs and Federations
 An SHG is an unregistered entity of between10-20 individuals,
having its own rules and regulations, office bearers and books of
accounts.
 SHGs are recognised by the RBI and government for specific
purposes.
 SHGs use savings of their members as well as funds from banks
and MFIs for providing credit to their members.
 SHGs network in clusters and form in to Federations which are
usually registered as Societies or Co-operative Societies

33. Societies
 Societies can be registered under the Societies Registration Act, 1860 or under
respective state acts.
 A society can be registered by any seven persons associated for any literary,
scientific or charitable purposes by subscribing their names to a memorandum of
association and filing with the registrar.
 Registration does not require any minimum initial capital contribution
 Difficulty to determine ownership makes banks uncomfortable in lending large
sums
 Cannot raise equity so scalability is an issue
 Cannot accept public deposit
 Exempt from Income Tax if registered under Section 12A of the Income Tax Act.
 Need registration under FCRA to be able to accept foreign grants

34. Trusts
 Public Trusts can be established under the respective state regulations. Private
trusts can be established under Indian Trusts Act 1882.
 Difficult to attract commercial equity and loans
 There is no minimum capital requirements
 Cannot accept public deposits
 Exempt from Income Tax if registered under Section 12A of the Income Tax
Act.
 Need registration under FCRA to be able to accept foreign grants

35. Co-operative Societies
 Cooperative Societies can be registered under
• Co-operative Societies Act, 1912, or
• Relevant state Co-operative Societies acts, or
• The Mutual Benefit Cooperatives Act
• Relevant state Mutually Aided Co-operative Societies Act, or
• Multi-state Co-operative Societies Act
• any other law relating to cooperatives in force in India.
 Primarily regulated by registrar of co-operative societies
 Can access equity as well as deposits from their members and can lend to their
members
 Membership generally restricted to individuals, other co-operatives and government
(including government corporations)
 Mobilization of equity is restricted as co-operative societies can raise equity only from
their members. The principle of ‗one person one vote‘ acts as disincentive to equity
mobilization from the members
 Banks are reluctant to lend to co-operative societies because of non-equity based
ownership and their tendency to get political

36. Co-operative Banks
 Could be
• Primary co-operative bank (urban co-operative banks)
• State co-operative bank
• Central co-operative bank
 Registered under central/state/multi-state co-operative acts. Regulated by Registrar of
Co-operatives for registration, management and audit
 Regulated under the Banking Regulation Act, 1949 by the Reserve Bank of India for
licensing, area of operations and interest rates
 Can undertake most of the banking activities
 Difficulty in raising equity and tendency to get political.
 Respective state governments have close control over central co-operative banks and
state cooperative banks. Many of these are not well-managed.
 Series of irregularities have been noted by RBI in many primary co-operative banks
and it has taken action against several existing banks.
 RBI is reluctant to give new licenses owing to failure of a large number of co-
operative banks in different parts of the country

37. Regional Rural Banks (RRBs)
 Established by the Central Government through a notification in the official
gazette
 Minimum capital requirement is Rs2.5 million
 The share capital of the RRBs is required to be held by the Central
Government, State Government and Sponsor Bank in the ratio 50:15:35
 From the financial year 2006-07 RRBs have been brought under Income Tax
net
 RBI has also stipulated that RRBs need to maintain disclose CAR starting
March 2008.

38. Local Area Banks (LABs)
 RBI allowed the establishment of Local Area Bank in 1996
 LABs are registered as public limited companies under the Indian Companies
Act 1956
 Minimum capital requirement for a LAB is Rs50 million
 Are allowed to operate in three geographically contiguous districts
 Can mobilise deposits from public
 Prudential norms related to banks are applicable but rules relating to liquidity
and interest rates applicable to RRBs are applicable
 At present only four LABs are functioning and no new licenses are being
issued
 Resumption of licensing of LABs with stricter capital requirements being
considered

39. Private banks
 Private banks have to obtain license from RBI under the Banking
Regulation Act -1949
 A minimum capitalization of Rs3bn (Rs300 crores) is required
for private sector banks, including wholly owned subsidiaries of
foreign banks
 Can do normal banking activities

40. Section-25 Companies
 Section 25 Companies are promoted for the purpose of promotion of commerce,
arts, religion, charity or any other useful purpose
 They are prohibited from payment of dividends
 RBI has exempted NBFCs licensed under section-25 of the Indian Companies
Act from registration, maintenance of liquid assets and transfer of profit to
Reserve Funds, provided
 They are engaged in micro-financing activities (Rs50,000 for small businesses and
Rs125,000 for housing)
 they do not mobilize public deposits
 Section-25 NBFCs find it difficult to mobilize equity owing to restrictions on
payment of dividends
 Can mobilise foreign grants if registered under FCRA
 Exempt from Income Tax if registered under Section 12A of the Income Tax Act.

41. Non-Banking Financial
Companies (NBFCs)
 Companies registered under Indian Companies Act 1956 can apply to RBI to carry on the
business of an NBFC
 NBFCs are required to have net owned funds of Rs20 millions
 Ownership can be defined precisely and they can raise equity
 Mobilisation of public deposits, though allowed, is almost impossible given strict guidelines
of the RBI
 Banks are comfortable lending to NBFCs which are well-capitalised and well-performing
 NBFCs are for-profit entities and are taxable
• FDI through automatic route is allowed subject the following limits
• FDI up to 51% - US$0.5 mn to be brought upfront
• FDI between 51% and 75% - US$5mn to be brought upfront
• FDI between 75% and 100%- US$50mn out of which 7.5 million to be brought up-front
 NBFCs are subject to prudential regulations regarding income recognition, asset classification
and provisioning, prudential exposure limits and accounting/disclosure requirements
provided
• they are mobilizing public deposits, or
• they are systemically important

42. Systemically Important
NBFCs
 All non-deposit taking NBFCs having asset size of Rs1bn
(Rs100 crores) or more as per last audited balance sheet will be
considered as systemically important NBFCs.
 Non-deposit taking and systemically important NBFCs will be
subject to capital adequacy regulations, single/group exposure
norms and disclosure pertaining to derivative transactions
 Capital Adequacy Ratio (CAR) requirement is higher for
systemically important NBFCs

43. Organizations under BC/BF
guidelines of RBI
Business Facilitators Business Correspondents
 Business facilitators can be used by the  BCs can undertake disbursement of
banks for various pre-disbursement loans as well as collection of principal.
and post-disbursement activities They can also accept deposits on
pertaining to lending. behalf of the banks.
 Does not include disbursement and  Banks can compensate BCs but BCs
collection activities cannot charge anything from the
 No approval is required from the RBI consumers
for using Business Facilitators  Transactions need to be accounted for
 NGOs, Farmers‘ Clubs, Co-operative and reflected in bank‘s books by end of
Societies, Post-offices, IT Enabled day or next working day
outlets of corporates, Insurance agents,  Societies/Trusts, Non-deposit taking
Well-functioning panchayats, Village NBFCs, Cooperative Societies, Post
Knowledge Centers, KVIC/KVIB offices, Section 25 Companies
centers, Agri Clinics

44. The MicroFinance Bill
 empowering the Reserve Bank of India (RBI) to regulate all microfinance
institutions (MFIs).
 it would be mandatory for micro finance institutions (MFI) to be registered
with the Reserve Bank and have a minimum net-owned funds of Rs 5 lakh.
The RBI, can increase this further to 10 lakh, the bill adds.
 a Micro-Finance Development Council will be set up to advise the
government on formulation of policies, schemes and other measures required
in the interest of orderly growth and development of the sector with a view
to promote financial inclusion.
 capping the interest rate charged by MFIs at 26%. A cap is untenable,
irrespective of the fact that it is 2% higher than the ceiling recommended by
the Malegam panel. Price control will only dampen the supply of
microfinance and compel the poor to turn to moneylenders.

45. Transformation
 MFIs registered as societies, trusts and  Issues in Transformation
Section-25 companies want to • MFI promoters find it difficult to mobilise
transform to a for-profit NBFC as Rs20mn of minimum capital required for an
NBFCs
 For profit structure allows them to • Many MFI promoters have ‗acquired‘ old
raise commercial equity NBFCs having lesser minimum capital
required but have to pay significant premium
 Banks are more comfortable lending to to the existing owners. There are also legacy
the NBFCs issues.
 Access to commercial equity and Bank • Transfer of assets and liabilities
 Option 1: Assets from the old entity can be purchased
funds helps them scale-up faster by the new entity
 Option 2: All new disbursement to be made by the
new entity and the loan portfolio of the old entity is
allowed to come down gradually
 Option 3: New entity gives loans to the clients who
can pre-pay loans in the old entity

46. Triggers of Transformation
 The biggest challenges are  Bolivia and Africa:
usually the greatest triggers Transformation of NGOs
of transformation – its all a • To Banks
matter of perception and • To FFPs
necessity  Indonesia: Transformation
• Size of mainstream to
• Diversity of services MicroFinance methods
• Financial sustainability  Bangladesh: Transformation
• Focus of a project into
• Taxation • Grameen Bank
• Other NGOs transforming to
Banks

47. Role of Central Bank and
Regulator
 Support financial liberalization and create conditions favorable to the sector
 Good Regulation and Supervision
Role of RBI  Supporting MicroFinance Pilot Projects
(Central Bank)  Collection and Publication of Data
 Training and Advocacy
 Framing policy and guidelines for rural financial institutions
 Providing credit facilities to issuing organisations
Role of NABARD  Preparation of potential-linked credit plans annually for all districts for
(Regulator) identification of credit potential
 Monitoring the flow of ground level rural credit.
Division of Responsibilities
NABARD SIDBI
Oversees program linking Banks and SHGs Lends to MFIs through SIDBI Foundation

48. CHALLENGES AND WAY
FORWARD

49. Challenges in India
 Size  Focus
• Growth in geographic area •Other Developmental activities V/s
• Growth in portfolio/client size MicroFinance
• Ability to train trainers. • Degree of specialisation needed for
MicroFinance
 Diversity of Services
 Others
• MFOs wanting to offer Savings
• Ability to attract and retain professional
• MFOs wanting to offer Risk Products
and committed human resources.
• Appropriate loan products for different
• Capacity to provide backward linkages or
segments.
create support structures for marketing.
 Financial Sustainability  Legal
• Internal growth
• Appropriate legal structures for the
• Access to funds structured growth of MF operations
• Finding adequate levels of equity for • Taxation For-profit mF activity V/s not-
the new entities to leverage loan funds for-profit NGO activities
• Ability to access loan funds at • Tax status of donor money
reasonably low rates of interest.

50. Information asymmetry
Decision to take a loan Loan usage Repayment
Don‘t know the type of Interest rate reflects Can not observe what the client is doing with
Client requesting loan probability of default the loan amount
Need to increase Safer clients always
Bad loan usage Unwillingness to repay
Interest rate drop out
Providing credit can
Become impossible

51. High Costs
 Most popular business model in India is SHG or JLG which incurs peculiar
costs like group formation, training , supervision, higher frequency of
installment payments.
 Average microfinance loan size is small – transaction cost / loan is higher
 Lending large loans would need due diligence and evaluation of client –
increasing cost.
 High Operational cost, esp. at loan origination and during monitoring due to
doorstep service and lack of technology.
 Intense Monitoring and Repeated Interactions
 Increased competition would lead to better service quality, lower loan sizes,
lower interest rates, product diversification and use of technology.
Technology innovation, improved rural infrastructure, borrower education and
urban microfinance would mitigate the high transaction cost.

52. Credit Risk
 Irregular flow of income due to seasonality
 High dependence on monsoons
 Uncertainty of Market Conditions
 Lack of skills leading to un-employability
 Lack of tangible proof of Income Assessment
 Lack of Information Sharing / Better Technology

53. Other Risks
 Operational Risk
 Business Promotion
 Literacy and Skill levels of clientele
 Diversion of funds to unproductive activities
 Regulatory issues

54. Reasons: Failure of Objectives
 Availability of less risky and more rewarding customers (hawkers and traders
in urban areas vs farmers)
 Opportunities to become intermediaries of commercial banks (banks lend
under compulsion – foreign banks facilitate securitization of these loans)
 Providing short term loans based on cash trading transactions (minimum
defaults)
 Resistant loans to farmers (dependence on monsoons, inadequate irrigation
facilities, lack of modernization)
 Wrong MFI assessment tools (still assessed based on coverage, profitability
and repayment – should be assessed on success in alleviating poverty and
aiding inclusive growth)

55. Urban Microfinance
 High proportion of wage earners among Urban Poor
 Average Family size of 5 with an expenditure of $100 (~Rs. 5000)
 67% HH live in own houses – 29% rent a house
Clientele  31% run atleast one business
 69% have atleast one outstanding loan
 Loans are usually taken from Moneylenders (49%), family members (13%), friends and / or
neighbours (28%) and rarely from a commercial source.
 Quicker Scale up – Quicker Breakeven
 Higher Loan sizes as compared to Rural Areas
 Opportunity for better utilization of technology
Opportunities
 Individual lending is more feasible
 Greater Economic opportunity – Greater available market landscape
 Social Advantage – Alleviation of housing shortages that create slums.
 No dedicated funds for support – capacity building or technological assistance for sector
growth
 No NABARD advantage as it is for rural microfinance
Challenges  Urban Poor have access to savings but no access to loans
 Startup cost and loan sizes are higher in cities – only big MFIs may set up operations
 Highly competitive sector due to the presence of major financial players.

56. The Role of Women
 Fewer women leaders in Micro –finance because:
• Separation between micro-finance and development
• Image of microfinance as highly technical, requiring
professionals (read men) from banking sector
• Women relegated to ―softer‖ issues of development – where
funding is scarce
• Paucity of investment by the sector in capacity building of
women leaders
• Lack of trained human resources (especially women staff) for
building cadre of women leaders

57. The Role of Women
 Women leadership is important because:
• Efficiency paradigm - Community leaders help reduce cost - it is better
management!
• Business point of view - women leaders who can take risks, are role
models, show how loans can benefit family – can increase business
• Increases ownership of the program –risk mitigation
AND OF COURSE FOR A MINORITY:
To achieve the dream of women having access to and control of
financial and non- financial resources

58. A PRACTICAL APPROACH TO
SHG FORMATION

59. Types of families to visit
Questions to ask:
 Does the family have only one earning member?
 Does the family bring drinking water from far away place?
 Are the members compelled to go far in the open in the absence of toilets?
 Are there old illiterate members in the family?
 Are there permanently ill members in the family?
 Are there children in the family who do not go to school?
 Is there a drug addict or a drunkard in the family?
 Is their house made of kuccha material – do they live in a slum?
 Do they regularly borrow from any moneylender – what do they pay back?
 Do they eat less than two meals a day?
 Do they belong to scheduled castes or scheduled tribes?
Yes > 3 Questions = Poor Family

60. Community Meetings
Community leaders and elders of the village
Explain to them your plan to form SHGs
This is the right time to tell everyone that the
meetings are not for ―giving‖ anything, but to
―enable‖ the poor families to come together and
help each other.
Explain the basics of SHGs

61. SHG Building
 Member attrition and addition are common phenomenon – do
not get disheartened.
 A group member should take the lead – all external parties
should be facilitators only.
 Trainings required:
• Basic Mathematics
• Book Building (Minutes, Loan Register, Weekly register, Member‘s Pass
Books)
• Scheduling Meetings
• Basics of money lending and interest calculation
• Social Aspects – Women Empowerment.

62. Linking of SHGs to Bank
 Opening SB A/c for SHGs
• Resolution from the SHG: The SHG has to pass a resolution in the group
meeting, signed by all members, indicating their decision to open SB A/c
with the bank. This resolution should be filed with the bank.
• Authorisation from the SHG: The SHG should authorise at least three
members, any two of whom, to jointly operate upon their account.
• Copy of the rules and regulations of the SHG: This is not a must but is
highly advisable and should be looked into by facilitators. If the group
has not formulated any such rules or regulations, loans can be sanctioned
without them.
• A savings bank account passbook may be issued to the SHG. This should
be in the name of the SHG and not in the name of any individual/s.

63. Internal Lending
 Saving for a minimum period of 2 to 3 months to build
a common savings fund.
 Purpose, terms and conditions for lending to its
members, rate of interest etc., may be decided by the
group through discussions during its meeting. Interest
is usually 2-3% per month.
 Simple and clear books of account of savings and
lending should be kept by the SHG.

64. Assessment of SHGs
S. No Factors to be checked Very Good Good Unsatisfactory
1 Group Size 15-20 10-15 <10
2 Type of Members only very poor 2-3 not poor many not poor
3 Number of Meetings 4 / month 2 / month <2 / month
4 Timing of Meetings After 1800 hrs between 0700 and 0900 hrs Other timings
5 Meeting Attending >90% 70-90% <70%
6 Member Participation Very High Medium Low
7 Savings Collection 4 / month 3 / month < 3 / month
8 Amount Saved Fixed amounts Varying amounts -
9 Interest on Internal Loans Depending upon purpose 24-36% >36%
10 Utilization of Savings Amount Fully used for loans Partially used for loans Poor Utilization
11 Loan Recoveries >90% 70-90% <70%
12 Maintainence of Books All books maintained Atleast important books maintained Irregular maintainence
13 Accumulated Savings > 5000 3000-5000 <3000
14 Knowledge of SHG Rules Known to all Known to all
15 Education Levels >20% can read or write <20% can read or write
16 Knowledge of Govt. Progs. All are aware Most are aware None are aware
 SHGs with 12 to 16 "very good‖ factors can get loans immediately.
 SHGs with 10 to 12 "very good‖ factors need 3 to 6 months‘ time to improve, before loan is
given.
 SHGs with rating of less than 10 ―very good‖ factors will not be considered for loan.

65. Sanction of Credit Facility
 The loan is always sanctioned and  The bank does not decide the purposes
issued in the name of the group. for which the SHG gives loans to its
 The amount of loan to the SHG can members. The purpose can be
be to the tune of 1 to 4 times of its emergency needs like illness in the
savings. family, marriage, etc. or buying of
 Savings assets for income generation /
acquisition of assets.
• The group‘s balance in the SB A/c
• Amount held as cash with the  The SHG makes the repayment to the
authorised persons bank.
• Amount internally lent amongst the  RBI/NABARD rules stipulate that no
members collateral security should be taken from
• Amount received as interest on the SHGs by banks.
loans  The bank cannot hold the SB A/c
• Any other contributions received by balance of the SHG as a Security as
the group like grants, donation, etc. this will prevent the SHG from lending
from its internal savings.

66. Sanction of Credit Facility
 The Reserve Bank of India has allowed the Documents required by banks for
banks freedom to decide on the interest
Loans
rates to be charged to the SHGs
 Inter-se Agreement to be executed by
all the members of the Self Help
 The rate of interest to be charged by the Group.(authorising a minimum of 3
group to its members is left to the group. It members to operate the account)
is usually 2-3% per month.
 Application to be submitted by SHG to
bank branch while applying for loan
 The group members are collectively assistance. (includes details of the
responsible for the repayment of loans to purposes for which the SHG gives
the bank. Under no circumstance, the SHG loans to its members)
should allow any of its members to default  Articles of Agreement for use by the
to the bank. bank while financing SHGs (contains
the duly stamped agreement between
the bank and the
 SHG wherein both the parties agree to
abide by the terms and condition)

67. THANK YOU

68. References
 Microfinance Sector – Legal and Regulatory Framework, Trilegal, Asian Development Bank, Discussion Paper,
Microfinance, November 2004
 Emerging Scenario for Microfinance Regulation in India, some observations from the field, GTZ, 2004.
 Microfinance: Reserve Bank‘s Approach. Speech of Mr YV Reddy in Indian School of Business
RBI Circulars/Press Releases/Notifications
 Financial Regulation of Systemically Important NBFCs and Banks‘ Relationship with them – for NBFCs,
RBI/2006-07/204, DNBS.PD/ CC.No. 86/ 03.02.089 /2006-07. 12 December 2006.
 Financial Inclusion by Extension of Banking Services - Use of Business Facilitators and Correspondents.
RBI/2005-06/288. DBOD.No.BL.BC. 58/22.01.001/2005-2006.
 25 January 2006
 Application of Capital Adequacy Norms to RRBs, RBI/2007- 2008/218
RPCD.CO.RRB.No. BC.44 /05.03.095/2007-08.. 28 December 2007.
 Guidelines for Setting-up Local Area Banks in the private Sector. Press Release 1996-
 97/103. 24 August 1996
 FAQ on NBFCs. 5 February 2007.
 Amendments to NBFC regulations, Ref.DNBS.(PD).CC.No. 12 /02.01/99-2000, 13 January 2000.