ACKNOWLEDGEMENT

It gives me an immense pleasure to express my deep sense

of gratitude to my internal guide Prof.Savitha Lakkol for
her enormous guidance and assistance .She has been my
mentor and guide, her continuous encouragement and
valuable suggestions helped me at every stage of this
project;

I would like to express my thanks to Prof J.S.Kiran

H.O.D of JSSCMS ,Mysore;

Finally, I would like to thank my family and friends for

their overwhelming support and encouragement.

Anup.B.M
 INTRODUCTION
The important finding of last three decades in the finance field is
“poor can save, can borrow and and certainly repay loans”. This is
world of microfinance.
A good definition of microfinance as provided by Robinson is,
‘Microfinance refers to small-scale financial services for both
credits and deposits —that are provided to people who farm or
fish or herd; operate small or micro enterprises where goods are
produced, recycled, repaired, or traded; provide services; work
for wages or commissions; gain income from renting out small
amounts of land, vehicles, draft animals, or machinery and tools;
and to other individuals and local groups in developing countries,
in both rural and urban areas’.

In the Indian context terms like "small and marginal farmers", “rural artisans" And
"economically weaker sections" have been used to broadly define micro-finance
customers. The recent Task Force on Micro Finance has defined it 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".Microfinance services are provided by formal
institutions such as rural banks and Cooperatives; semiformal institutions such as
non-government organizations; and Informal sources such as moneylenders and
shopkeepers. Institutional microfinance is defined to include microfinance services
provided by both formal and semiformal institutions. Microfinance institutions are
defined as institutions whose major business is the provision of microfinance
services. At present, a large part of microfinance activity isconfined to credit only.
Women constitute a vast majority of users of micro-credit and savings services.
Self-help group (SHG) is an association of people belonging to similar
Socioeconomic characteristics, residing in the locality. The SHG concept is most
Appropriate and can succeed in our country only if and when a holistic approach is
imbibed in the Promotion of SHGs as self-sustaining local organizations. However
bank linkages for SHGs are at present driven more by annual targets than as a
system. A SHG has an average size of about 15 people from a homogenous class.
They come together for addressing their common problems. They are encouraged
to make voluntary thrift on a regular basis. They use this pooled resources to make
small interest bearing loans to their members.The process helps them imbibe the
essentials of financial intermediation including prioritization of needs, setting
terms and conditions, and accounts keeping.

MICROFINANCE INSTITUTIONS IN INDIA

A range of institutions in public sector as well as private sector offers
Microfinance services in India. They can be broadly categorized into two
Categories namely

1. Formal institutions
2. Informal institutions

The former category comprises Apex Development Financial institutions

,Commercial Banks, Regional Rural Banks, and Cooperative Banks that provide
micro finance services in addition to their general banking activities and are
referred to as micro finance service providers .On the other hand, the informal
institutions that undertake microfinance services as their main activity are
generally referred to as MicroFinance Institutions (MFIs). While both private and
public ownership are found in the case of formal financial institutions offering
microfinance services, the MFIs are mainly in the private sector.The micro finance
service providers include apex institutions like National Bank for Agriculture and
Rural Development (NABARD), Small Industries Development Bank of India
(SIDBI), and, Rashtriya Mahila Kosh (RMK).The micro finance initiative in rivate
sector can be traced to the initiative undertaken by Ms.Ela Bhatt for providing
banking services to the poor women employed in the unorganized sector in
Ahmedabad City of Gujarat State.NABARD during the early eighties conducted a
series of research studies in association with MYRADA (a leading NGO from
South India) and also independently which showed that despite having a wide
network of rural bank branches that implemented specific poverty alleviation
programmes and self-employment opportunities through bank credit for almost two
decades, a very large number of the poorest of the poor continued to remain
outside the fold of the formal banking system. NABARD, however, also took a
conscious decision to experiment with other successful strategies such as
replicating Grameen, wholesaling funds through NGOMFIs.The dominant model
of microfinance – the group lending model pioneered by the Grameen Bank in
Bangladesh – socializes the costs of lending to poor women by providing them
access to credit on the basis of “social collateral” obtained through membership in
borrower groups.Here social capital helps correct for imperfect information about
borrowers lacking in formal credit and employment histories and substitutes for
collateral by ensuring against default through social sanction and peer
enforcement.

Y.H.Malegam Committee Report

The Board of Directors of the Reserve Bank of India, at its meeting held on
October 15, 2010 formed a Sub-Committee of the Board to study issues and
concerns in the microfinance sector in so far as they related to the entities regulated
by the Bank.
The composition of the Sub-Committee was as under:-
Shri Y.H. Malegam – Chairman
Shri Kumar Mangalam Birla
Dr. K. C. Chakrabarty
Smt. Shashi Rajagopalan
Prof. U.R. Rao
Shri V. K. Sharma (Executive Director) – Member Secretary

The terms of reference of the Sub-Committee were as under:-

1. To review the definition of ‘microfinance’ and ‘Micro Finance Institutions
(MFIs)’ for the purpose of regulation of non-banking finance companies (NBFCs)
undertaking microfinance by the Reserve Bank of India and make appropriate
recommendations.
2. To examine the prevalent practices of MFIs in regard to interest rates, lending
and recovery practices to identify trends that impinge on borrowers’ interests.
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
money lending legislation of the States and other relevant laws to NBFCs/MFIs.
5. To examine the role that associations and bodies of MFIs could play in
enhancing transparency disclosure and best practices
6. To recommend a grievance redressal machinery that could be put in place for
ensuring adherence to the regulations recommended at 3 above.
7. To examine the conditions under which loans to MFIs can be classified as
priority sector lending and make appropriate recommendations.
We would, therefore, recommend that a NBFC classified as a NBFC-MFI should
satisfy the following conditions:

a) Not less than 90% of its total assets (other than cash and bank balances and
money market instruments) are in the nature of “qualifying assets.”
b) For the purpose of (a) above, a “qualifying asset” shall mean a loan which
satisfies the following criteria:-

i) the loan is given to a borrower who is a member of a household whose annual

income does not exceed Rs. 50,000;
ii) the amount of the loan does not exceed Rs. 25,000 and the total outstanding
indebtedness of the borrower including this loan also does not exceed Rs. 25,000;
iii) the tenure of the loan is not less than 12 months where the loan amount does
not exceed Rs. 15,000 and 24 months in 11other cases with a right to the borrower
of prepayment without penalty in all cases;
iv) the loan is without collateral;
v.)the aggregate amount of loans given for income generation purposes is not less
than 75% of the total loans given by the MFIs;
vi) the loan is repayable by weekly, fortnightly or monthly installments at the
choice of the borrower.
c) The income it derives from other services is in accordance with the regulation
specified in that behalf.

We would also recommend that a NBFC which does not qualify as a NBFC-MFI
should not be permitted to give loans to the microfinance sector, which in the
aggregate exceed 10% of its total assets.

Areas of Concern
The advent of MFIs in the Microfinance sector appears to have resulted in a
significant increase in reach and the credit made available to the sector. Between
31st March 2007 and 31st March 2010, the number of outstanding loan accounts
serviced by MFIs is reported to have increased from 10.04 million to 26.7 million
and outstanding loans from about Rs. 3800 crores to Rs. 18,344 crores. While this
growth is impressive, a number of studies both in India and abroad have
questioned whether growth alone is effective in addressing poverty and what the
adverse consequences of a too rapid growth might be. In particular, in the Indian
context, specific areas of concern have been identified: These are:
a) unjustified high rates of interest
b) lack of transparency in interest rates and other charges.
c) multiple lending
d) upfront collection of security deposits
e) over-borrowing
f) ghost borrowers
g) coercive methods of recovery

We have attempted a normative cost structure which can form the basis for a
mandated margin cap as under:
% of Loan
Portfolio
(a) Staff Costs (say) 5.00
(b) Overheads 3.00
(other than staff
costs) say
(c) Provision for 1.00
loan losses, say
Su 9.00
b-total
(d) Return on Equity (say):
15% post tax i.e. 22.6107% pre-tax on 15% 3.39
of Loan Portfolio
Total internal cost 12.39
(e) Cost of Funds (say)
12% on borrowings i.e. 85% of 12% on Loan 10.20
Portfolio
Total of internal and external costs 22.59
Rounded off to 22.00

REVIEW OF LITERATURE

Literature review discusses the work of previous scholars that support, offer a
counter position, and provide a context for my study.
Methodology:
Reviewing the articles on this topic in the internet
1. Microfinance – An Introduction by- R.Srinivasan and M.S.Sreeeram
This round table focusses on issues relating to microfinance in
India. The Indian
microfinance sector is a museum of several approaches found
across the world. Indian microfinance has lapped up the Grameen
blueprint; it has replicated some aspects of the Indonesian and
the Bolivian model. In addition to the imported artifacts of
microfinance,we also have the home-grown model of self-help
groups.
The round table discussion thereafter looks at four major issues
the economic
attractiveness of microfinance both to NGOs and to commercial
banks; the relative merits of various delivery channels; the issue
of growth; and finally, what lies beyond microcredit.

2. Interest Rate Debate in Microfinance by ElyseRowe

Over the past few decades, the microfinance market has changed dramatically.
Previously dominated by small-scale NGOs that were primarily donor and grant-
funded, the industry has seen the emergence of formalized for-profit institutions
that have successfully attracted funding from commercial markets. Though widely
recognizing the need for capital, many in the industry fear commercialization may
have negative effects on microfinance clients.The influx of commercial capital,
coupled with the 2006 controversy in Andhra Pradesh and the 2007 controversy
around Banco Compartomos , ignited the debate around profits, interest rates and
commercial approaches to microfinance. With the demand for microfinance far
outweighing the number of clients served, proponents argue that commercial
funding enables the industry to grow faster and provided needed services to those
still waiting. Opponents worry about the rapid flood of commercial funding and the
ability to effectively serve the double bottom line—balancing positive social
impact and financial sustainability—with pressures for high returns for investors.

INTEREST RATES: WHY THEY ARE HIGH?

Interest rates in microfinance vary significantly throughout the industry but

generally range from 30-35% per year, with approximately 10% of clients paying
over 62%.iii These rates are higher than traditional banks, causing many to simply
assume that the industry is unethically reaping high profits off of the poor.
However, offering financial services to poor clientele requires a high number of
transactions on small loan principals, creating transaction costs that are
significantly higher than traditional banking. Other factors affecting rates include
administrative costs, operational practices and efficiencies, cost of funds,
competition, deposits, etc. As a comparison, moneylenders can charge the poor
between 61-700%.iv Generally, the industry agrees that interest should
be a balance between covering costs in order to ensure sustainability, therefore
increasing financial inclusion, with what the clients can afford. Debate continues,
however, on what “reasonable” rates of return include and what is done with the
profits.
 RESEARCH METHODOLOGY

Type of research
This study is a descriptive study which aims to compare the
growth of microfinance sector and contribution of banks in this
field. This is based on the secondary data published by NABARD
and also to see the impact of Malegam committee on MFI’s and its
sustainability.

RESEARCH OBJECTIVES

1) Sustainability of MFI’s after the implementation of Malegam committee.

2) To compare the performance of private sector banks with
that of public sector banks in terms of microfinance
provided.
3) To examine the role by banks in the development of SHGs in
the realm of
Microfinance.

Scope of the study

The study aims at providing an in depth knowledge of

microfinance, its operations
and benefits.

Sampling technique

The technique is convenient sampling. The sample taken is the

commercial banks, cooperative banks and private banks.
Research tools
Secondary data collection (literature survey)—
Sources: Publications of NABARD
Library

Data analysis
Averages, ratios Tables.

Research Problem
India is the largest emerging market for microfinance. Over the
past decade, the
microfinance sector has been growing in India at a fairly steady
pace. Though no
microfinance institution (MFI) in India has yet reached anywhere
near the scale of the well-known Bangladeshi MFIs. The sector in
India is characterized by a wide diversity of methodologies and
legal forms. However, very few Indian MFIs have achieved
sustainability yet.

This research attempts to study the sustainability of MFI’s under the malegam
committee and evaluation of private and public sector banks in this field.

Analysis

Bank Cumulative Cumulative Cumulative Cumulative

No. No. bank loan bank loan
of SHGs of SHGs disbursed disbursed upto
provided with provided with upto 31 March 31 March
bank loan upto bank loan upto 2005 2006
31 March 31 March
2005 2006
Public 810,175 1,141,570 38,158.93 64,396.78
sector
Private 33,298 45,603 3,431.26 5,461.51
sector

Public sectors banks have grown tremendously in this field in year

as in this field in the year 2005-06 the loan disbursed are as much
as 84.84% of total disbursements till 2005.

Public sector has been an active player and has a share of 94.9%
of new SHGs formed in 2005-06.

SBI the largest player in the public sector with a share of 30.91% has disbursed
loans
which forms 31.78% of total loan disbursed in 2005-2006

In the private sector ICICI has been the major player with a
disbursement of 75.53% in year 2005-06 and with maximum
4741 SHGs promoted in this year.
Some of the MFI’s in India

Category-I
0-100(offices)
(1) (2) (3) (4) (5) (6)
Total 65875 167912 17802 115802 37761 189529
assets 40 71 21 06 65 80
offices 40 46 7 39 14 94
Personn 224 230 75 108 313 690
el
Financial structure

Capital/as 7.4% 30.58 4.59% 14.63 35.6% 15.09

set ratio % % %
Debt/equi 15.73 3.02 32.52 5.93 1.81 6.18
ty ratio
Deposit to 1.16% 1.27% 12.14 0 50.6% 0
loans %
Deposit 1.02% .98% 35.52 0 30.65 0
total % %
assets
Gross 86.18 81.27 90.9% 100% 60.63 95.67
loan % % % %
portfolio
to TA
Deposits

Total 32390
26545 17712 0 11578 0
2 5 50
Overall performance

ROA 4.61% 2.885 1.19% 1.13% 2.43% 1.49%

ROE 108.3 12.15 45.37 8.2% 6.83% 11.31
% % % %
Operatio 123.4 134% 107.1 108.3 123.45 111.7
nal self % % % % %
sufficienc
y
Revenues

Financial 24.4% 26.46 17.95 15.07 12.81 18.39

revenues/as % % % % %
set
Profit 18.43 36.39 6.5% 7.3% 18.99 10.34
margin % % % %
Yield on 26.46 29.09 20% 14.58 21.0% 18.01
gross % % % %
portfolio
nomi
Yield on 17.89 18.98 11.31 6.8% 11.31 9.51%
gross % % % %
portfolio
real

Expenses

Total 20.29 21.59 16.75 13.93 10.38 16.26

% % % % % %
Efficiency

Operating 10.78 12.78 7.28 4.05 9.94 5.4%

expenses/lo % % % % %
an portfolio
Personnel/lo 6.15% 7.36% 7.31 2.18 0.74 2.95%
an portfolio % % %

Category-II
100-500(offices)
Total 214962 579572 354223 387703 131286 350345
assets 23 90 56 83 48 35
offices 112 159 105 210 118 165
Personn 893 1430 1317 1433 572 1476
el
Financial structure

Capital/as 17.49 13.36 32.34 .91% 14.85 18.44

set ratio % % % % %
Debt/equi 4.66 9.65 2.4 261.5 5.84 6.64
ty ratio
Deposit to 0 9.86% 16.15 0 16.78 0
loans % %
Deposit 0 9.86% 13.63 0 13.8% 0
total %
assets
Gross 86.36 86.39 85.14 91.94 81.83 88.64
loan % % % % % %
portfolio
to TA
Deposits

Total 0 26699 47217 0 17270 0

29 01 06
Overall performance

ROA 0.06% 2.8% 3.17% 0.46% 5.86% 3.87%

ROE 0.4% 21.18 9.45% 229.4 41.1% 33.9%
% %
Operatio 103.13 125.2 80.78 102.6 232.67 169.5
nal self % % % % % %
sufficienc
y

Revenues

Financial 10.79 26.09 22.5% 23.47 22.27 13.57

revenues/as % % % % %
set
Profit 2.96% 18.02 14.16 1.21% 32.82 38.45
margin % % % %
Yield on 12.12 30.87 26.01 24.74 24.18 14.87
gross % % % % % %
portfolio
nomi
Yield on 4.5% 21.62 29.32 22.76 16.41 8.96%
gross % % % %
portfolio
real
Expenses

Total 10.45 21.53 29.73 22.76 16.41 8.96%

% % % % %
Efficiency

Operating 2.67% 15.22 32.6 14.47 11.65 2.84%

expenses/lo % % % %
an portfolio
Personnel/lo 1.4% 8.10% 18.11 9.97 7.32 1.1%
an portfolio % % %

Category-III
500 & above(offices)

Total 2782118 1166880 3292835 4774154 1823059

assets 73 40 32 84 16
offices 650 590 803 1115 668
Personn 3763 2198 5436 10585 3839
el
Financial structure
Capital/as 12.4% 3.48% 11.4% 20.54 8.12%
set ratio %
Debt/equi 7.6 30.27 12.2 3.98 11.77
ty ratio
Deposit to 0.19% 0 1.56% 0 16.04
loans %
Deposit 0.09% 0 1.38% 0 13.17
total %
assets
Gross 83.35 78.48 99.88 86.49 81.79
loan % % % % %
portfolio
to TA

Deposits

Total 91024 0 13991 0 232356

 56 20
Overall performance

ROA 3.32% 0.25% 5.2% 2.84% 6.49%

ROE 26.34 2.7% 45.40 13.93 88.22
% % % %
Operatio 131.84 102.4 153.79 124.36 154.31
nal self % % % % %
sufficienc
y
Revenues

Financial 20.61 11.56 22.30 33.12 22.16

revenues/as % % % % %
set
Profit 22.08 2.03% 32.65 19.0% 34.05
margin % % %
Yield on 23.54 12.49 20.93 2.25% 25.40
gross % % % %
portfolio
nomi
Yield on 15.11 4.85% 12.68 16.74 16.9%
gross % % %
portfolio
real
Expenses

Total 15.48 11.34 14.13 18.50 14.5%

% % % %
Efficiency

Operating 9.73% 5.27% 5.85 12.24 8.35

expenses/lo % % %
an portfolio
Personnel/lo 6.21% 1.6% 4.31 7.14 5.23
an portfolio % % %

The above tables are grouped into 3 categories depending on the size (number of
offices) category I is called as small, category II is called as medium and category
III is called as large

The companies are selected on a random basis among 153 MFI’s in INDIA and the
balance sheet of average of 4 years are taken for study and in category III there are
only 5players in market having offices more than 500
Among these categorized companies I have taken average of and compared with
the committee report category-Ihas a profit margin of 16.32% which is in excess of
6.32% which can be done by reducing the expenses else MFI’s falling in this
category will be in danger or might undergo loss,

The 2nd category i.e category-II has an average of 17.93% which is in excess of
7.93% , this percentage reduction is really verydifficult and the companies survival
in industry is bit tough

And coming to the category-III it has excess of 11.9% which is higher among the
categories but has a least expenses so it would be easier for them to reduce the
profit margin and although they are the market leaders and sustainability for them
is easier

And the committee recommends that NBFC-MFI’s cannot give more than 25000
rupees to a single family, previously they used to borrow from multiple lenders so
now it has been restricted to 1 so NBFC-MFI’s will have a tough competition in
lending to customers as the number of persons decreases.

Development of SHGs in the realm of microfinance.

Banks have played a significant role in this field by ensuring accessibility to poor.
The efforts of banks can be appreciated on the reach to the common man. There
has been a tremendous increase in the number of SHGs promoted by banks for the
past few years.
In 2001 149050 SHGs were formed, where as in 2002 there were 197653 new
SHGs promoted which shows there has been a growth of 132% and
In 2003 new SHGs prromted were 255882 which shows a growth of 129% from
the previous year.
In 2004 new SHGs promoted by banks were 361731 which depicts growth of
141% against previous years.
The quantum of bankloan to SHGs has been constantly increasing which shows the
efforts of banks in this field.

SHGs formed and bank loan disbursed from yr 2001-2004

in India.

year New SHGs growth rate Bank loan (Rs Growth rate in
formed against in million) bank loan
 previous year
in SHGs
2001 149050 ---- 263825 ----
2002 197653 132% 461478 174%
2003 255882 129% 717360 155%
2004 361731 141% 1079091 150%

There has been a considerable increase in the reach to the poor

and amount of
disbursements by banks.

RESEARCH LIMITATIONS

1)The study is limited to the secondary data.

2)The study has done on the availability of the data
Submitted to,
Prof Savitha s lakkol

Submitted by,
Anup B M