Contents

Microfinance Overview ................................................................................................................................. 2 Recent developments in the microfinance industry ..................................................................................... 2 L&T Finances Microfinance Segment ........................................................................................................... 3 Microfinance Model and Methodology .................................................................................................... 3 Background to the Case Study ...................................................................................................................... 4 Deliverables................................................................................................................................................... 5

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Microfinance Overview
Microfinance in the Indian context is formally defined as the provision of financial credit through loans of up to Rs. 50,000 to households that are traditionally considered not to be credit worthy, and typically lack access to banking and related financial services.1 In the past two decades, different types of financial service providers have emerged, including nongovernment organizations; cooperatives, community-based development institutions such as SHGs and credit unions, commercial and state banks and MFIs. The MFI channel includes organizations under a host of different legal forms that can be classified into two groups: for-profit organizations and not-for-profit organizations. The measure of a person who is poor or is living in poverty is generally classified across various thresholds of daily income. The World Bank uses reference lines set at US$ 1.25 and US$ 2 per day at 2005 PPP terms. While the international poverty line is assumed at US$ 1.25 a day, a less frugal standard of US$ 2 per person per day is applied for developing countries or regions such as Latin America and Eastern Europe.2 In 2008, the World Bank estimated that 1.4 billion people in the developing world were living on less than US$ 1.25 in 2005, and 2.6 billion people were living on less than US$ 2.00 per day. The World Bank also estimated that 41.6% of the population in India is below the US$ 1.25 a day PPP and 75.6% of the population is below the US$ 2.0 a day PPP poverty line, as of 2005. On a population of nearly 1.1 billion, this translates to nearly 832 million poor people below US$ 2.00 a day PPP, or approximately 177 million poor households, in India, assuming an average family size of 4.7.3

Recent developments in the microfinance industry

The state of Andhra Pradesh is said to have a unique position of leadership within Indian microfinance, evidenced by the presence of the four largest MFIs in India in the state. The state government made significant investments in subsidizing financial inclusion through self help group ("SHGs") programmes. However, tensions between the Andhra Pradesh government and MFIs grew, as MFIs began to increase financing to their customers.4 As a result, on October 15, 2010, the Government of Andhra Pradesh promulgated the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Ordinance, 2010 (the "MFI Ordinance") to protect women SHGs in Andhra Pradesh from exploitation by private MFIs through usurious interest rates and coercive means of recovery by regulating money lending transactions by MFIs and for achieving greater transparency with respect to such transactions in Andhra Pradesh.

1 2

Inverting the Pyramid, 2009, Indian Microfinance Coming of Age, Intellecap ("Inverting the Pyramid") World Bank, http://web.worldbank.org, accessed on July 4, 2011 3 World Bank, http://data.worldbank.org, accessed on July 4, 2011 4 Intellecap, Indian Microfinance Crisis, 2010: Turf War or a Battle of Intentions, October 2010

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Subsequently, with effect from January 1, 2011, the Government of Andhra Pradesh introduced the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act, 2011 (Act No. 1 of 2011) (the "MFI Act"). The MFI Act provides for inter alia the registration and cancellation of registration of microfinance institutions, filing of periodic returns by microfinance institutions, limits on interest recoverable by microfinance institutions, prohibition on security for loans provided to SHGs and prior approval for grant of further loans to SHGs. The board of directors of the RBI, at their meeting held on October 15, 2010 formed a subcommittee of the board (the "Malegam Committee") to study issues and concerns in the microfinance sector in so far as they related to the entities regulated by the RBI. The Malegam Committee submitted its report on the issues and concerns in the MFI sector on January 19, 2011. Key recommendations set out in the report include the creation of a separate category of NBFCs operating in the microfinance sector, such NBFCs being designated as NBFC-MFI, which should lend to an individual borrower only as a member of a JLG and should have the responsibility of ensuring that the borrower is not a member of another JLG. Not more than two MFIs should lend to the same borrower and bank advances to MFIs shall continue to enjoy "priority sector lending" status. Furthermore, the Central Government has, on July 6, 2011, released the proposed draft of the Micro Finance Institutions (Development and Regulation) Bill, 2011, (the Draft MFI Bill) aimed at providing access to financial services for the rural and urban poor and promoting the growth and development and regulation of micro finance institutions. The Draft MFI Bill is subject to public comment and further, is subject to the approval of the Indian Parliament as well as the assent of the President of India. Microfinance industry has got some positive indicators during the past one year. Most of the mid and large micro-finance institutions have registered moderate portfolio growth for current financial year. The much awaited micro-finance constitution bill is waiting for cabinet nod in the parliament. Bank loans to MFIs have reasonably improved; RBI has deferred and relaxed the qualifying asset norm for another year i.e. 1st April 2013. Internal commitments by MFIs to self regulate and imbibe discipline within the system gradually seems to be visible. MFIs have started providing client information to credit bureaus like HIGH MARK and EQUIFAX. Major MFIs are diversifying into unrelated products. The overall scenario looks lot better than a year before.

L&T Finances Microfinance Segment

L&T Finance, commenced its microfinance operations in June 2008, and it is integral to its aim of contributing to financial inclusion in the Indian economy in a commercially viable manner. The operations of microfinance segment are currently spread over seven states, namely, Andhra Pradesh, Tamil Nadu, Maharashtra, Karnataka, Gujarat, West Bengal and Orissa.

Microfinance Model and Methodology

L&T Finances lending model is in the nature of direct lending and disbursement of loans to its customers, as opposed to the "intermediary model", where funds are lent to self-help groups, or non-governmental organizations that have microfinance operations. As such, the lending business is based on a Joint- Liability Group or JLG model, which has been used by MFIs for over 30 years
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internationally, including in Bangladesh. The operations of microfinance segment are premised on the belief that the poor, who form the customer-base for microfinance products, have skills that are under-utilized, and that if they are given access to credit, will be able to identify new incomegenerating opportunities and grow existing business activities such as operating local retail shops (known as kirana stores), tailoring, basketweaving and rearing of livestock. We believe that by providing access to microfinance loans, the economic opportunities for poor families can be substantially enhanced. Since inception of this business in June 2008, we have disbursed approximately one million loans. The microfinance operations comprise the following elements: Village Identification and Appraisal: Field staff identifies various villages which are a potential source of business for the microfinance segment. As such, L&T Finances field staff conducts surveys in order to determine whether or not a particular village is suitable for lending business before we commence operations in that area. Such a survey includes an evaluation of local conditions and operational suitability based on the total population and economic profile of the village, transportation links (primarily roads), political stability and safety and security. Joint-Liability Group Formation and Individual Credit Appraisal: A JLG is an arrangement under which microfinance loan borrowers are grouped together in order to guarantee each others' loans, which we believe helps to engender a culture of mutual support between borrowers and presents a lower risk of default. As such, potential members of a JLG are individually assessed and appraised, and if approved, are formed into JLGs with other individuals. Documentation and Disbursement: Once a JLG is formed, all requisite documentation is completed and the loans are disbursed at one of the meeting centers. Collections: Following disbursement of the loan, the field staff travels to the villages where the various JLGs are based in order to collect payments, dependant on the repayment schedule of the loans for each JLG.

Background to the Case Study

For us, FY 2012 has been a year of consolidation for MFI business. We view microfinance business as robust, predictable, profitable & scalable business offering multiple small denomination products and services to the financially excluded poor population of India for the purpose of enhancing their income generation capacity. Considerable efforts have been put in robust quality control and risk management systems to ensure that the business risks remain within predefined acceptable metrics and the overall business is compliant with all regulations. Credit, Surveillance and training teams were strengthened. System and Process improvements were made to check various risks involved in the microfinance business. Transaction level risk is taken care by screening every application under internal credit check ( a set of rules based on credit policy ) and external credit check ( by sending all the applications which pass the internal credit check to credit bureau and analyzing the credit history of every applicant ). Portfolio level

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risk is measured based on set parameter which are mentioned in the credit policy like the credit concentration (percentage of population covered in a district), credit triggers (PAR and arrears rate) etc., Central collection team takes care of the default risk by continuously monitoring the debtors, preventing roll forwards, resolving NPA cases and initiating legal actions against the defaulters. Surveillance team basically keeps a check on fraud risk. Borrower audit, Meeting centre audit, Disbursement audit and Collection audits are conducted to keep a watch on the process risk together with the fraud risk and security risk. We continuously monitors various other risks like the macroeconomic, regulatory, political, inefficiency, interest rate, asset & liability, commercial and social mission related risks.

Deliverables
L&T Finance is aiming substantial growth in the Microfinance business within the next 3 to 5 years. As a means to this, entry into product offerings other than JLG is envisioned. You are expected to present a business plan for at least one new product that can be offered through the Microfinance channel. You are expected to clearly demonstrate: 1. The product that you are recommending and the selection methodology 2. Product design and promotion strategy 3. Organization structure design, considering your product to be delivered through a standalone structure 4. Portfolio quality monitoring mechanism 5. Projection of financials to demonstrate viability of your business model (the business should broadly breakeven within the second year of operations)

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