1

PROJECT
ON

MICROFINANCE(INDIA)
Project Submitted to the
Satyawati College, University of Delhi
In fulfillment of the requirement of
B.COM. (HONS.)-3rd Year

BY: NIRMALA
ADITIMAHAVITHYALYA COLLEGE ROLL NO.-3088
SATYAWATI COLLEGE ROLL NO. - 9
SECTION-A
B.COM (HONS.) 3RD Year

UNDER THE SUPERVISION OF

Mr.SHAILANDRA SAXENA,
SATYAWATI COLLEGE
UNIVERSITY OF DELHI
DELHI

DECLARATION
I,NIRMALA hereby declare that I, a student of
ADITIMAHAVIDHYALYA College have prepared
the

following

project

on

MICRO-

FINANCE(INDIA) and have submitted this

project

to

my

mentor

Mr.

SHAILANDRA

SAXENA the information presented in this

report is true and original to the best of my
knowledge

NIRMALA

ACKNOWLEDGEMENT
2

I would like to express my sincere thanks and deep

felt

gratitude

SAXENA

to

whose

encouragement

my

mentor

help,

has been

support
instrumental

completion of this project.

My sincere thanks to the staff
College

and

the

head

of

Mr.SHAILANDRA
and
for

the

members of the

department

for

the

necessary departmental assistance and support.

I am also grateful to my friends PUNEET AND
ANKUSH for their generous help and support in
conducting the research and helping me complete
the project.

NIRMALA

TABLE OF CONTENTS:S.no NAME OF THE TOPIC

1.

Page
No.

Overview of the Microfinance Sector

2.

Definition of Microfinance and MFIs

3.

Top 50 MICROFINANCE INSTITUTIONS

4.

Legal and Regulatory Framework for the

Microfinance Institutions in India

11

5.

The Micro Credit

Model

12

6.

Business model of GRAMEEN bank

13

7.

14

Loan Insurance

8.

15

9.

The Repayment Mechanism

Self help group (SHG)

10.

Joint liability group (JLG)

17

11.

18

12.

NABARD Initiative in Micro Finance

Product Design

13.

What is Risk Management?

20

14.

Major Risks to Microfinance Institutions:

21

15.

SWOT Analysis of
micro finance

22

16.

Why micro finance provides loan to the women

only?

24

17.

16

19

25
Why MFIs is being criticized for providing
loans to the women only?
4

18.

Malegam Committee Microfinance Report

19.
Some major recommendations of the Committee are:
20.

Comments on the Recommendations of the Malegam

Committee

21.

25
26

27

28

Recommendations and suggestions

Main Highlights Of This Project:[MICRO-FINANCE(INDIA)]

(i). Use Of Very Simple

Language to increase the level of
understanding.
(ii). The Entire Project of 30 pages
Can be Revised in just 25 minutes
by
5

reading the bold and

highlighted words covered under
different topics.
(ii). Latest Data as available has
been fully utilized for the purpose
of
making this project A RICH
SOURCS OF KNOWLEDGE.
(iv).Pointwise and Tabular
presentation is done wherever
necessary to
increase the understanding of
topic.
(v). Topics are discussed very
briefly with suitable examples.

Overview of the Microfinance

INTODUCTION

Micro- finances concept was first given by the

nobel laureate prof. Mohammad yunus in 1976.
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 .
It is further estimated that of these households, only
about 20% have access to credit from the formal
sector. Out of these 80 million house hold, 80%
takes credit from the informal sources i.e. local
Zamidars, Chit Funds etc.
In the Indian context terms like "small and
marginal farmers", " rural artisans" and
economically weaker sections" have been
used to broadly define micro-finance
7

customers.
Women constitute a vast majority of users of
micro-credit and savings services. In short, Micro
Finance means providing very poor families with
very small loans to help them engage in productive
activities or grow their very small businesses .
It is firstly (and this is essential) a tool in the fight
against poverty.

Defination of MF
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.
providing financial assistance to an individual
or an eligible client, either directly or through a
group mechanism for:
an amount, not exceeding rupees fifty thousand in
aggregate per individual, for small and tiny
enterprise, agriculture, allied activities
(including for consumption purposes of such
individual) or
an amount not exceeding rupees one lakh fifty
thousand in aggregate per individual for housing
purposes,
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The proposed regulations further define an MFI as an

organization or association of individuals including the
following if it is established for the purpose of carrying
on the business of extending microfinance services:
a society registered under the Societies
Registration Act, 1860,
a trust created under the Indian Trust Act,1880 or
public trust registered
a cooperative society / mutual benefit society /
mutually aided society registered under any
State enactment:

a) a cooperative bank as defined in clause (CCI) of

section 5 of the Banking
Regulation Act, 1949 or
b) a cooperative society engaged in agricultural
operations or industrial activity or purchase or sale of any
goods and services.

Microcredit, Microfinance
and Micro plus
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Microcredit refers specifically to loans and the

credit needs of clients,
Microfinance covers a broader range of financial
services
Examples savings, insurance, housing loans and
remittance transfers.
Microfinance plus activities such as
entrepreneurial and life skills training

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Top 50 MICROFINANCE
INSTITUTIONS:
Rank Name
1
ASA
Bandhan (Society and
2
NBFC)
3
Banco do Nordeste
Fundacin Mundial de la
4
Mujer Bucaramanga
5
FONDEP Micro-Crdit
Amhara Credit and Savings
6
Institution
Banco Compartamos, S.A.,
7
Institucin de Banca Mltiple
Association Al Amana for the
8
Promotion of MicroEnterprises Morocco
Fundacin Mundo Mujer
9
Popayn
Fundacin WWB Colombia
10
Cali
11 Consumer Credit Union
12

Country
Bangladesh
India
Brazil
Colombia
Morocco
Ethiopia
Mexico
Morocco

Colombia
Colombia
Russia

13

12
13

'Economic Partnership'
Fondation Banque Populaire
pour le Micro-Credit
Microcredit Foundation of
India

14

EKI

15
16
17

Saadhana Microfin Society

Jagorani Chakra Foundation
Grameen Bank

18

Partner

19

Grameen Koota
Caja Municipal de Ahorro y
Crdito de Cusco
Bangladesh Rural
Advancement Committee
AgroInvest
Caja Municipal de Ahorro y
Crdito de Trujillo
Sharada's Women's
Association for Weaker
Section

20
21
22
23
23

13

Morocco
India
Bosnia and
Herzegovina
India
Bangladesh
Bangladesh
Bosnia and
Herzegovina
India
Peru
Bangladesh
Serbia
Peru
India

14

24
25
26
27
28
29
30
31
32
33
34
35
36
37

Bosnia and
MIKROFIN Banja Luka
Herzegovina
Khan Bank (Agricultural Bank Mongolia
of Mongolia LLP)
INECO Bank
Armenia
Fondation Zakoura
Morocco
Dakahlya Businessmen's
Egypt
Association for Community
Development
Asmitha Microfin Ltd.
India
Credi Fe Desarrollo
Ecuador
Microempresarial S.A.
Dedebit Credit and Savings
Ethiopia
Institution
Bosnia and
MI-BOSPO Tuzla
Herzegovina
Fundacion Para La Promocion Nicaragua
y el Desarrollo
Kashf Foundation
Pakistan
Shakti Foundation for
Bangladesh
Disadvantaged Women
enda inter-arabe
Tunisia
Kazakhstan Loan Fund
Kazakhstan
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38
39
40
41
42
43
44
45
46
47
48
49
50

Integrated Development
Bangladesh
Foundation
Microcredit Organization
Bosnia and
Sunrise
Herzegovina
FINCA ECU
Ecuador
Caja Municipal de Ahorro y
Peru
Crdito de Arequipa
Crdito con Educacin Rural Bolivia
BESA Fund
Albania
SKS Microfinance Private
India
Limited
Development and Employment Jordan
Fund
Programas para la Mujer
Peru
Peru
Kreditimi Rural i Kosoves
Kosovo
LLC (formerly Rural Finance
Project of Kosovo)
BURO, formerly BURO
Bangladesh
Tangail
Opportunity Bank A.D.
Serbia
Podgorica
Sanasa Development Bank
Sri Lanka
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There are seven companies of India

in top 50 companies in the world. poor
people getting beneficial from the micro
finance , 80 to 90 million are from
India only. So there is still a huge
market and opportunities in this
segment.

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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..

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.

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3. NOT-FOR-PROFIT COMPANIES, SEC 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.
If objects of that company are restricted to the
promotion of 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,

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The micro-credits
model

The model is fairly

straightforward and simple.
Focus on 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.

Draw up a weekly or biweekly repayment schedule.

In case any member defaults the
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entire circle is denied access to credit.

Banks have been given freedom to formulate
their own lending norms keeping in view
ground realities. Regarding unit cost, unit
size, maturity period, grace period, margins,
etc.

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Business model of 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.Grameen Bank borrowers own 94% of
the Bank. The remaining 6% are owned by the
government.

Working model of
Grameen bank:

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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..
Each borrower must belong to a fivemember 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
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members. Grameen enjoys very high

payback ratesover 98 percent.
Grameen bank is not only a Micro
financing institution but it is Micro
financing plus, provide to the poor needs
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 themselvesowned by women
who rely on the microcredit loans for
income generation. each branch has to be
self-sustaining.no borrowing from the
head office.Profit goes back to the
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borrowers.

Grameen bank has 21,000 students with

student loans, studying in medical schools
and elsewhere. They have also provided
some scholarships to the children of our
borrowers each year. They even give loans
to beggars(struggling members).

Loan Insurance
All the borrowers of Grameen bank have to
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pledge the 16 Decisions.

The 16 Decisions are mentioned under:
1. We shall follow 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 reconstruct them.
4. We shall grow vegetables all the year round.
We shall eat plenty of them and sell the surplus.
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.
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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.
15. 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
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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:

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
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for micro enterprise, and every micro enterprise

being successful. Independent fieldwork
showed that Grameen Bank clients used their
loans for many different purposes - business,
food consumption, health, education and even
dowry.
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. they were issued with larger
loans by Grameen branch managers to repay
earlier loans.

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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:"

Need of
SHG's:
There are needs for SHGs, which in specific
terms are as under:To mobilize the resources of the
individual members for their collective
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economic development.
To uplift the living conditions of the
poor. To create a habit of savings.
Utilization of local resources.
To mobilize individual skills.
To assist the members financially at the
time of need.
To identify problems, analyzing and
finding solutions in the group.
To develop linkages with institutions of
NGOs.

(1).Structure of SHGs:

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
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informal group should not be of more than 20

people. The group need not be registered.

(2).Condition required for

membership for SHG's:
From one family, only one person can
become a member of an SHG.
The group normally consists of either
only men or only women.
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
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members are both from

rich as well as poor class, the poor may
hardly get an opportunity to express
themselves).
Members should be rural poor (By poor
one should be guided by the living
conditions).

Joint liability group

(JLG)
"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.
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JLG
features:
3-5 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.
Lending may start from group size of
not less than three members.

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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.
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.i.e. distribution of loans and credits to the
poor people. It was set up with an initial capital of Rs
100 crore,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
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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.

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 prepares, on annual basis, rural credit
plans; these plans form the base for annual
credit plans of all rural financial
institutions.
It promotes research in the fields of rural
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banking, agriculture and rural

development.

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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Product
Design
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.

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(i.)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
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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
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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 answeringThree basic
questions:
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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?
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
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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.
Major Risks to Microfinance Institutions:
(1).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.

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Credit risk:
The risk to earnings or capital due to borrowers' late
and non-payment of loan obligations.
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 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.

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Liquidity risk is the risk that an MFI

cannot meet its
obligations on a
timely basis. Liquidity risk usually arises
from management's inability to adequately
anticipate and plan for changes in funding
sources and cash needs.

Interest rate risk is the risk of financial loss

from changes in market interest rates.

How to manage interest rate risk?

Managers may refinance some of the shortterm 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
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pays a slightly higher rate on those funding

sources.
To boost profitability,
MFIs may purposely mismatch
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.

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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.

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.
Established an inspection unit that
performs random operational checks.
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SWOT Analysis of micro

finance

SWOT stands for Strength, Weakness, Opportunity,

and Threat.
Strength
Helped in reducing the poverty: By
providing small loans to this people Micro
finance helps in reducing the poverty.

Huge networking available: For MFIs and

for borrower, both the huge network is there
In India.

Weakness
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Not properly regulated: there would be

high case of credit risk and defaults.
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's
70% of the population lives in rural area,
and that portion is not fully touched.

Opportunit
y
Huge demand and supply gap:. In India
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around 350 million of the people are poor and

only few MFIs there to serving them.
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

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.

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Threat
High Competition: As the more players will
come in the market, their competition will rise

Over involvement of Govt.

Why micro finance provides loan to the

women only?
A majority of microfinance programs
generally target womenoften more
financially responsible at repaying than men
as clients, providing them with direct control
over resources.

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Why MFIs typically targeted women.

These factors included:

Repayment rates are higher than men,

Women are on average poorer than men, so
focusing on women can help achieve poverty
targets.
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.
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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 womenmaking women responsible
for loans, ensuring repayment through
women, maintaining savings accounts for
women, providing insurance coverage through
womenmicrofinance programs send a
strong message to households as well as to
communities.

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Why MFIs is 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..
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
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children etc. and they easily found at home

also.

Malegam Committee
Microfinance Report
Background
The Reserve Bank of India in October 2010 set up a
Sub-Committee of its Central Board of Directors to
study the issues and concerns in microfinance sector,
under the Chairmanship of Shri Y H Malegam, a
senior member on the Reserve Banks Central Board
of
Directors.
RBI regulates only those MFIs which are
registered with it as non-banking finance companies.
Although registered companies cover over 80% of
the microfinance business , in terms of number of
companies, they constitute a small percentage of the
total number of MFIs in the country. The RBI,
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however, does not prescribe lending rates for these

institutions.

The terms of reference of the Sub-Committee

were as under:1. To review the definition of microfinance and
Micro Finance Institutions
2. To examine the prevalent practices of MFIs in
regard to interest rates, lending and recovery
practices
3. To delineate the objectives and scope of
regulation of NBFCs undertaking microfinance
by the Reserve Bank and the regulatory framework
needed to achieve those objectives.
4. To examine and make appropriate
recommendations in regard to applicability of
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money lending legislation of the States and other

relevant laws to NBFCs/MFIs.
7. To examine the conditions under which loans to
MFIs can be classified as priority sector lending
and make appropriate recommendations.
8. To consider any other item that is relevant to the
terms of reference.

Some major recommendations of the

Committee are:
There are limits of an annual family income of
Rs.50,000 and an individual ceiling on loans to
a single borrower of Rs.25,000
1.Not less than 75% of the loans given by the MFI
should be for income-generating purposes.
2.There is a restriction on the other services to be
provided by the MFI which has to be in
accordance with the type of service and the
maximum percentage of total income as may be
prescribed.
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The Sub-Committee has recommended that bank

lending to NBFCs which qualify as NBFC-MFIs
will be entitled to priority lending status. With
regard to the interest chargeable to the borrower, the
Sub-Committee has recommended an average
margin cap of 10 per cent for MFIs having a
loan portfolio of Rs. 100 crore and of 12 per cent
for smaller MFIs and a cap of 24% for interest on
individual loans.
A borrower can be a member of only one SelfHelp Group (SHG) or a Joint Liability Group
(JLG)
1.Not more than two MFIs can lend to a single
borrower
2.There should be a minimum period of
moratorium between the disbursement of loan
and the commencement of recovery
3.The primary responsibility for avoidance of
coercive methods of recovery must lie with the
MFI and its management
4.The Reserve Bank must prepare a draft Customer
Protection Code to be adopted by all MFIssmen
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5.For monitoring compliance with regulations, the

Sub-Committee has proposed a four-pillar
approach with the responsibility being shared by
(a) MFI (b) industry associations (c) banks and (d)
the Reserve Bank.

Comments on the Recommendations of the

Malegam Committee

In that sense this is an opportunity missed. The

following are some specific comments within this
broad framework.
1. Definition of microfinance clients as those with
annual income of less than Rs 50,000 will exclude
large numbers of low income families.
2. Cap of Rs. 25,000 as the maximum loan amount
needs to be customised regionally and adjusted for
inflation
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3. Cap of only two lenders (1 MFI + 1 SHG or 2

MFIs) should not be necessary
4. Pricing cap (lower of markup of 10% / 12% and
24% interest) is restrictive and difficult to
implement
5. Net Own Funds of Rs. 15 crores and the
requirement that smaller NBFCs not
undertake microfinance beyond 10% of their
assets does not conform with the spirit of
financial inclusion

Recommendations and
suggestions
Under mention are the few recommendations and
suggestions, which I felt during
my
project on
Micro
Finance are:59

60

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 Private Sector in this Industry.

6. One strict recommendation is that there

should not over involvement of the Government in
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MFIs. Because it will stymie the growth and

prevent others MFIs to enter.

Conclusion
There is no doubt that the last few years saw a
gold rush in the Indian microfinance industry.
This should necessarily be followed by a period
of moderation, sound consultation and policy
rationalisation. It may be noted that the incidence
of indebtness, particularly among small and
marginal farming households, in Andhra Pradesh
is the highest in India. The rural distress in the
state has been more than evident in reported
incidents of farmers suicides and hunger deaths.
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This distress cannot be seen as resulting from

leaving out or excluding the rural poor from
the process of liberalisation. Instead, they have
been forced into market relations that are
intrinsically loaded against them. They have not
been marginalized and excluded; instead, they
have been incorporated and integrated into
market systems in which their lack of assets, low
bargaining power have operated to make their
material conditions more adverse.
This is perhaps the time to restart the older
debates as to how to help the poor build and
strengthen their resource base. This is also the
time to ask under what circumstances and in
what institutional form should microfinance
figure in the list of anti poverty strategies.
The MFIs are able to offer credit at lower interest
rates to the poor compared to the traditional
players. The relevance of microfinance in a
developing country is that it helps the poor
reduce their financial burden so that they can
channelise their meager resources productively to
improve livelihood situation. At the end I would
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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 terms of high living standard and
happiness.

At last I am concluding by project with a very

famous saying:
"Do not wait; the time will never be
just right. Start where you stand and work
with whatever tools you may have at your
command, and better tools will be found as
you go along"

Napolean Hill

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References

Economic and political weekly, Commentary,

Tara Nair
www.rbi.org.in/press release
www.forbes.com
www.google.com
www.microfinanceinsight.com
www.indiamicrofinance.com
www.ifmr.ac.in
www.gdrc.org
www.accion.org
www.nabard.org/microfinance

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