Microfinance- A Critical Analysis

Index
1. Definition 2. History of Microfinance 3. Microfinance today 4. Microfinance Products & Services 5. Microfinance Systems 6. Microfinance in India 7. Legal Regulations 8. Microfinance Models 9. Impact of the SHG Bank Linkage Programme 10. Marketing of Microfinance Products 11. Issues in Microfinance 12. Conclusion 13. Bibliography
1 MICROFINANCE-A CRITICAL ANALYSIS
Microfinance Definition According to International Labor Organization (ILO), Microfinance is an economic development approach that involves providing financial services through institutions to low income clients. In India, Microfinance has been defined by The National Microfinance Taskforce, 1999 as provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards. "The poor stay poor, not because they are lazy but because they have no access to capital." The dictionary meaning of finance is management of money. The management of money denotes acquiring & using money. Micro Finance is buzzing word, used when financing for micro entrepreneurs. Concept of micro finance is emerged in need of meeting special goal to empower under-privileged class of society, women, and poor, downtrodden by natural reasons or men made; caste, creed, religion or otherwise. The principles of Micro Finance are founded on the philosophy of cooperation and its central values of equality, equity and mutual self-help. At the heart of these principles are the concept of hum Traditionally micro finance was focused on providing a very standardized credit product. The poor, just like anyone else, (in fact need like thirst) need a diverse range of financial instruments to be able to build assets, stabilize consumption and protect themselves against risks. Thus, we see a broadening of the concept of micro finance--- our current challenge is to find efficient and reliable ways of providing a richer menu of micro finance products. Micro Finance is not merely extending credit, but extending credit to those who require most for their and familys survival. It cannot be measured in term of quantity, but due weightage to an Introduction
development and the brotherhood of man expressed through people working together to achieve a better life for themselves and their children. quality measurement. How credit availed is used to survive and grow with limited means. Microfinance is the provision of financial services to low-income clients, including consumers and the self-employed, who traditionally lack access to banking and related services. More broadly, it is a movement whose object is a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers. Those who promote microfinance generally believe that such access will help poor people out of poverty. The term "microfinance" describes the range of financial products (such as microloans, micro savings and micro-insurance products) that microfinance institutions (MFIs) offer to their clients. Traditionally, banks have not provided financial services to clients with little or no cash income. Banks must incur substantial costs to manage a client account, regardless of how small the sums of money involved. There is a break-even point in providing loans or deposits below which banks lose money on each transaction they make. Poor people usually fall below it. In addition, most poor people have few assets that can be secured by a bank as collateral. As documented extensively by Hernando De Soto (a Peruvian Economist) and others, even if they happen to own land in the developing world, they may not have effective title to it. This means that the bank will have little recourse against defaulting borrowers. Microfinance is a type of banking service that is provided to unemployed or low-
income individuals or groups who would otherwise have no other means of gaining financial services. Ultimately, the goal of microfinance is to give low income people an opportunity to become self-sufficient by providing a means of saving money, borrowing money and insurance. The World Bank estimates that there are more than 500 million people who have directly or indirectly benefited from microfinance-related operations. Microfinance can provide an effective
way to assist and empower poor women, who make up a significant proportion of the poor and suffer disproportionately from poverty. Microfinance can contribute to the development of the overall financial system through integration of financial markets. Origin/History of Microfinance The concept of microfinance is not new. Savings and credit groups that have operated for centuries include the "susus" of Ghana, "chit funds" in India, "tandas" in Mexico, "arisan" in Indonesia, "cheetu" in Sri Lanka, "tontines" in West Africa, and "pasanaku" in Bolivia, as well as numerous savings clubs and burial societies found all over the world. Formal credit and savings institutions for the poor have also been around for decades, providing customers who were traditionally neglected by commercial banks a way to obtain financial services through cooperatives and development finance institutions. One of the earlier and longerlived micro credit organizations providing small loans to rural poor with no collateral was the Irish Loan Fund system, initiated in the early 1700s by the author and nationalist Jonathan Swift. Swift's idea began slowly but by the 1840s had become a widespread institution of about 300 funds all over Ireland. Their principal purpose was making small loans with interest for short periods. At their peak they were making loans to 20% of all Irish households annually. In the 1800s, various types of larger and more formal savings and credit institutions began to emerge in Europe, organized primarily among the rural and urban poor. These institutions were known as People's Banks, Credit Unions, and Savings and Credit Co-operatives. The concept of the credit union was developed by Friedrich Wilhelm Raiffeisen and his supporters. Their altruistic action was motivated by concern to assist the rural population to break out of their dependence on moneylenders and to improve their welfare. From 1870, the unions expanded rapidly over a large sector of the Rhine Province and other regions of the German States. The cooperative movement quickly spread to other countries in Europe and North America, and eventually, supported by the cooperative movement in developed countries and donors, also to developing countries. In Indonesia, the Indonesian People's Credit Banks (BPR) or The Bank Perkreditan Rakyat opened in 1895. The BPR became the largest microfinance system in Indonesia with close to 9,000 units.
In the early 1900s, various adaptations of these models began to appear in parts of rural Latin America. While the goal of such rural finance interventions was usually defined in terms of modernizing the agricultural sector, they usually had two specific objectives: increased commercialization of the rural sector, by mobilizing "idle" savings and increasing investment through credit, and reducing oppressive feudal relations that were enforced through indebtedness. In most cases, these new banks for the poor were not owned by the poor themselves, as they had been in Europe, but by government agencies or private banks. Over the years, these institutions became inefficient and at times, abusive. Between the 1950s and 1970s, governments and donors focused on providing agricultural credit to small and marginal farmers, in hopes of raising productivity and incomes. These efforts to expand access to agricultural credit emphasized supply-led government interventions in the form of targeted credit through state-owned development finance institutions, or farmers' cooperatives in some cases, that received concessional loans and on-lent to customers at below-market interest rates. These subsidized schemes were rarely successful. Rural development banks suffered massive erosion of their capital base due to subsidized lending rates and poor repayment discipline and the funds did not always reach the poor, often ending up concentrated in the hands of betteroff farmers. Meanwhile, starting in the 1970s, experimental programs in Bangladesh, Brazil, and a few other countries extended tiny loans to groups of poor women to invest in micro-businesses. This type of microenterprise credit was based on solidarity group lending in which every member of a group guaranteed the repayment of all members. These "microenterprise lending" programs had an almost exclusive focus on credit for income generating activities (in some cases accompanied by forced savings schemes) targeting very poor (often women) borrowers. ACCION International, an early pioneer, was founded by a law student, Joseph Blatchford, to address poverty in Latin America's cities. Begun as a student-run volunteer effort in the shantytowns of Caracas with $90,000 raised from private companies, ACCION today is one of the premier microfinance organizations in the world, with a network of lending partners that spans Latin America, the United States and Africa.
SEWA Bank. In 1972 the Self Employed Women's Association (SEWA) was registered as a trade union in Gujarat (India), with the main objective of "strengthening its members' bargaining power to improve income, employment and access to social security." In 1973, to address their lack of access to financial services, the members of SEWA decided to found "a bank of their own". Four thousand women contributed share capital to establish the Mahila SEWA Co-operative Bank. Since then it has been providing banking services to poor, illiterate, self-employed women and has become a viable financial venture with today around 30,000 active clients. Grameen Bank. In Bangladesh, Professor Muhammad Yunus addressed the banking problem faced by the poor through a programme of action-research. With his graduate students in Chittagong University in 1976, he designed an experimental credit programme to serve them. It spread rapidly to hundreds of villages. Through a special relationship with rural banks, he disbursed and recovered thousands of loans, but the bankers refused to take over the project at the end of the pilot phase. They feared it was too expensive and risky in spite of his success. Eventually, through the support of donors, the Grameen Bank was founded in 1983 and now serves more than 4 million borrowers. The initial success of Grameen Bank also stimulated the establishment of several other giant microfinance institutions like BRAC, ASA, Proshika, etc. Through the 1980s, the policy of targeted, subsidized rural credit came under a slow but increasing attack as evidence mounted of the disappointing performance of directed credit programs, especially poor loan recovery, high administrative costs, agricultural development bank insolvency, and accrual of a disproportionate share of the benefits of subsidized credit to larger farmers. The basic tenets underlying the traditional directed credit approach were debunked and supplanted by a new school of thought called the "financial systems approach", which viewed credit not as a productive input necessary for agricultural development but as just one type of financial service that should be freely priced to guarantee its permanent supply and eliminate rationing. The financial systems school held that the emphasis on interest rate ceilings and credit subsidies retarded the development of financial intermediaries, discouraged intermediation between savers and investors, and benefited larger scale producers more than small scale, lowincome producers.
Meanwhile, microcredit programs throughout the world improved upon the original methodologies and defied conventional wisdom about financing the poor. First, they showed that poor people, especially women, had excellent repayment rates among the better programs, rates that were better than the formal financial sectors of most developing countries. Second, the poor were willing and able to pay interest rates that allowed microfinance institutions (MFIs) to cover their costs. In 1990s two features - high repayment and cost-recovery interest rates - permitted some MFIs to achieve long-term sustainability and reach large numbers of clients. Another flagship of the microfinance movement is the village banking unit system of the Bank Rakyat Indonesia (BRI), the largest microfinance institution in developing countries. This stateowned bank serves about 22 million microsavers with autonomously managed microbanks. The microbanks of BRI are the product of a successful transformation by the state of a state-owned agricultural bank during the mid-1980s. The 1990s saw growing enthusiasm for promoting microfinance as a strategy for poverty alleviation. The microfinance sector blossomed in many countries, leading to multiple financial services firms serving the needs of microentrepreneurs and poor households. These gains, however, tended to concentrate in urban and densely populated rural areas. It was not until the mid-1990s that the term "microcredit" began to be replaced by a new term that included not only credit, but also savings and other financial services. "Microfinance" emerged as the term of choice to refer to a range of financial services to the poor, that included not only credit, but also savings and other services such as insurance and money transfers.
ACCION helped found BancoSol in 1992, the first commercial bank in the world dedicated solely to microfinance. Today, BancoSol offers its more than 70,000 clients an impressive range of financial services including savings accounts, credit cards and housing loans - products that just five years ago were only accessible to Bolivia's upper classes. BancoSol is no longer unique: more than 15 ACCION-affiliated organizations are now regulated financial institutions. Today, practitioners and donors are increasingly focusing on expanded financial services to the poor in frontier markets and on the integration of microfinance in financial systems development.
The recent introduction by some donors of the financial systems approach in microfinance - which emphasizes favorable policy environment and institution-building - has improved the overall effectiveness of microfinance interventions. But numerous challenges remain, especially in rural and agricultural finance and other frontier markets. Today, the microfinance industry and the greater development community share the view that permanent poverty reduction requires addressing the multiple dimensions of poverty. For the international community, this means reaching specific Millennium Development Goals (MDGs) in education, women's empowerment, and health, among others. For microfinance, this means viewing microfinance as an essential element in any country's financial system. Microfinance Today In the 1970s a paradigm shift started to take place. The failure of subsidized government or donor driven institutions to meet the demand for financial services in developing countries let to several new approaches. Some of the most prominent ones are presented below. Bank Dagan Bali (BDB) was established in September 1970 to serve low income people in Indonesia without any subsidies and is now well-known as the earliest bank to institute commercial microfinance. While this is not true with regard to the achievements made in Europe during the 19th century, it still can be seen as a turning point with an ever increasing impact on the view of politicians and development aid practitioners throughout the world. In 1973 ACCION International, a United States of America (USA) based non governmental organization (NGO) disbursed its first loan in Brazil and in 1974 Professor Muhammad Yunus started what later became known as the Grameen Bank by lending a total of $27 to 42 people in Bangladesh. One year later the Self-Employed Womens Association started to provide loans of about $1.5 to poor women in India. Although the latter examples still were subsidized projects, they used a more business oriented approach and showed the world that poor people can be good credit risks with repayment rates exceeding 95%, even if the interest rate charged is higher than that of traditional banks. Another milestone was the transformation of BRI starting in 1984. Once a loss making institution channeling government subsidized credits to inhabitants of rural Indonesia it is now the largest MFI in the world, being profitable even during the Asian financial crisis of 1997 1998. In February 1997 more than 2,900 policymakers, microfinance practitioners and representatives of various educational institutions and donor agencies from 137 different countries gathered in
Washington D.C. for the first Micro Credit Summit. This was the start of a nine year long campaign to reach 100 million of the world poorest households with credit for self employment by 2005. According to the Microcredit Summit Campaign Report 67,606,080 clients have been reached through 2527 MFIs by the end of 2002, with 41,594,778 of them being amongst the poorest before they took their first loan. Since the campaign started the average annual growth rate in reaching clients has been almost 40 percent. If it has continued at that speed more than 100 million people will have access to microcredit by now and by the end of 2005 the goal of the microcredit summit campaign would be reached. As the president of the World Bank James Wolfensohn has pointed out, providing financial services to 100 million of the poorest households means helping as many as 500 600 million poor people. Who are the clients of micro finance? The typical micro finance clients are low-income persons that do not have access to formal financial institutions. Micro finance clients are typically self-employed, often household-based entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in small income-generating activities such as food processing and petty trade. In urban areas, micro finance activities are more diverse and include shopkeepers, service providers, artisans, street vendors, etc. Micro finance clients are poor and vulnerable non-poor who have a relatively unstable source of income. Access to conventional formal financial institutions, for many reasons, is inversely related to income: the poorer you are, the less likely that you have access. On the other hand, the chances are that, the poorer you are, the more expensive or onerous informal financial arrangements. Moreover, informal arrangements may not suitably meet certain financial service needs or may exclude you anyway. Individuals in this excluded and under-served market segment are the clients of micro finance. As we broaden the notion of the types of services micro finance encompasses, the potential market of micro finance clients also expands. It depends on local conditions and political climate, activeness of cooperatives, SHG & NGOs and support mechanism. For instance, micro credit might have a far more limited market scope than say a more diversified range of financial services, which includes various types of savings products, payment and remittance services, and various insurance products. For example, many very poor farmers may not really wish to borrow, but
rather, would like a safer place to save the proceeds from their harvest as these are consumed over several months by the requirements of daily living. Central government in India has established a strong & extensive link between NABARD (National Bank for Agriculture & Rural Development), State Cooperative Bank, District Cooperative Banks, Primary Agriculture & Marketing Societies at national, state, district and village level. Role of Microfinance The micro credit of microfinance progamme was first initiated in the year 1976 in Bangladesh with promise of providing credit to the poor without collateral , alleviating poverty and unleashing human creativity and endeavor of the poor people. Microfinance impact studies have demonstrated that Microfinance helps poor households meet basic needs and protects them against risks. The use of financial services by low-income households leads to improvements in household economic welfare and enterprise stability and growth. By supporting womens economic participation, microfinance empowers women, thereby promoting gender-equity and improving household well being. The level of impact relates to the length of time clients have had access to financial services. Microfinance Products and Services The following products and services are currently being offered by MFIs:
Microloans: Microloans (also known as microcredit) are loans that have a small value; most loans are less than US$100 in size. These loans are generally issued to finance entrepreneurs who run micro-enterprises in developing countries. Examples of micro-enterprises include basket-making, sewing, street vending and raising poultry. The average global interest rate charged on micro-loans is about 35%. Although this may sound high, it is much lower than other available alternatives (such as informal local money lenders). Moreover, MFIs must charge interest rates that cover the higher costs associated with processing the labor-intensive micro-loan transactions.
Microsavings: Microsavings accounts allow individuals to store small amounts of money for future use without minimum balance requirements. Like traditional savings accounts in developed nations, micro-savings accounts are tapped by the saver for life needs such as weddings, funerals and old-age supplementary income.
Micro-Insurance: Individuals living in developing nations have more risks and uncertainties in their lives. For example, there is more direct exposure to natural disasters, such as mudslides, and more health-related risks, such as communicable diseases. Microinsurance, like its non-micro counterpart, pools risks and helps provide risk management. But unlike its traditional counterpart, micro-insurance allows for insurance policies that have very small premiums and policy amounts. Examples of micro-insurance policies include crop insurance and policies that cover outstanding balances of micro-loans in the event a borrower dies. Due to the high administrative expense ratios, micro-insurance is most efficient for MFIs when premiums are collected together with microloan repayments.
Microfinance services are provided by three types of sources: formal institutions, such as rural banks and cooperatives; semiformal institutions, such as nongovernment organizations; and Informal sources such as money lenders 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. Development of Microfinance Asian Development Bank (ADB) is an international development finance institution whose mission is to help its developing member countries reduce poverty and improve the quality of life of their people. It was established in the year 1966. Their vision is to make an Asia and Pacific poverty free. Headquartered in Manila, and established in 1966, ADB is owned and financed by its 67 members, of which 48 are from the region and 19 are from other parts of the globe.
ADB's main partners are governments, the private sector, nongovernment organizations, development agencies, community-based organizations, and foundations. Under Strategy 2020, a long-term strategic framework adopted in 2008, ADB will follow three complementary strategic agendas: inclusive growth, environmentally sustainable growth, and regional integration.
About Strategy 2020 Strategy 2020, ADB's long-term strategy approved in April 2008, sets ADB's strategic course for its operations to the year 2020. To fight poverty in a region of more than 600 million poor people, Strategy 2020 will refocus ADB operations on three development agendas inclusive economic growth, environmentally sustainable growth, and regional integration. Strategy 2020 identifies drivers of change that will be stressed in all its operations developing the private sector, encouraging good governance, supporting gender equity, helping developing countries gain knowledge, and expanding partnerships with other development institutions, the private sector, and community-based organizations. By 2012, 80% of ADB's lending will be in five core operational areas identified as ADB's comparative strengths

Infrastructure Environment Regional cooperation and integration Finance sector development Education
By 2020, about 50% of operations will be in private sector development and private sector operations, and 30% in regional cooperation and integration.
ADB will continue to operate on a more selective basis in health, agriculture, and disaster and emergency assistance. The Strategy will serve as ADB's main strategic document from 2008 to 2020, replacing the longterm strategic framework for 2001-2015 released in 2000. Inclusive Social Development Building human capital and addressing vulnerability Inclusive social development is an essential component of poverty reduction and the achievement of the MDGs, and is therefore the second pillar of ADB's Poverty Reduction Strategy. Inclusive development seeks to
improve the quality of life of the poor and those vulnerable to poverty through building human capital in social sector areas such as health and population policy as well as in education
assist individuals, households and communities to better manage life risks (social protection) promote gender equality and women empowerment, and support coherent social integration including fostering participation and targeting of the poor and vulnerable, as well as social capital and a more inclusive society
Inclusive social development also requires due consideration be given to social safeguards, particularly with regards to involuntary resettlement in economic and urban infrastructure projects.
Environmental Sustainability: Reducing vulnerability of the poor to degraded and hazardous conditions Environmental sustainability is critical to sustainable development and, as a consequence, to the objectives of poverty reduction and ADB's
Poverty Reduction Strategy : Poverty of opportunities, bad living conditions, and insecurity are often related to environmental degradation. The poor - both urban and rural - are often the biggest victims of environmental degradation and at the same time poverty can exacerbate ecological problems. Environment related poverty is often also closely related to regional and cross-border (particularly water) issues. A major portion of Asia's core poor can be found

living in remote forest areas (the upland poor, often also indigenous people), among the fisherfolk communities (the coastal poor), on marginal land areas (the dryland poor) and among those affected by regular floods (the wetland poor) in congested cities and towns with bad shelter conditions (the slum poor).
In addition, natural hazards make the poor particularly vulnerable to external shocks such as earthquakes, tsunami, and major storms (the disaster poor). Often environmental poverty has cross-border and regional dimensions. ADB's approach to environment related poverty considers the immediate needs of the poor affected by a degraded, hazardous, and marginal environments. Other more long-term approaches to environmental sustainability that benefit the poor comprise ADB's clean energy and urban transport initiatives. Through its Poverty and Environment Program (PEP), ADB aims at accelerating learning about poverty-environment linkages. In addition, ADB is currently enhancing its poverty reduction operations through sound environmental management in the areas of soil conservation, flood management, urban environmental improvement, sustainable ecosystem management, and disaster protection end emergency support for the vulnerable poor.
Regional Cooperation for Poverty Reduction Enhancing trade, incomes and regional public goods Poverty often has regional and cross-border dimensions. This applies particularly to geographical areas with natural resources constraints. Such areas are often also home to indigenous people which comprise the core of the rural poor. Of particular importance for poverty reduction are enhanced trade and income opportunities for the poor, the usage of export earnings, sharing of information and infrastructure services such as regional energy, and promoting mobility transfer of remittances. Regional cooperation also addresses global public goods in environment and health, such as degradation of sub-regional waters and land, global warming, and the transmission of HIV/AIDS and Avian Flu. It can strengthen global partnerships as expressed in the Millennium Development Goal (MDG). Regional cooperation is therefore a thematic area of ADB's strategy for reducing poverty in the Asia and Pacific region ADB's regional cooperation strategy focuses on:

Cross-border infrastructure Regional trade and investment Money and finance; and Other regional public goods.
ADB promotes regional cooperation through sub-regional cooperation programs and capacity development on Asia Regional Integration Center (ARIC). In pursuing its vision, ADB's main instruments comprise loans, technical assistance, grants, advice, and knowledge.
Although most lending is in the public sector - and to governments - ADB also provides direct assistance to private enterprises of developing countries through equity investments, guarantees, and loans. In addition, its triple-A credit rating helps mobilize funds for development.
Microfinance Systems Most microfinance institutions use some sort of group system to distribute their services to their clients. There are some exceptions, including the Village Unit System of BRI in Indonesia, the
worlds biggest and most profitable MFI, but groups seem generally to predominate. Bank Rakyat Indonesia (BRI) is one of the oldest established banks in Indonesia, dating back to 1895. Its focus from the start has always been on delivering the best banking services possible to micro, small and medium-sized business- especially in the agriculture segment. We have consistently tailored our services to meet the needs of the low income group in the community, said David Malligan, GM, IT. Along with the rapid development in the banking industry, BRI now has 4,447 working units across Indonesia. Many otherwise well informed observers and even some senior bankers in India and elsewhere, appear to believe that the group system pioneered in 1976 by the Grameen Bank in Bangladesh is the predominant or even the only such system. However this is not the case. Both the systems have their advantages and disadvantages, it depends upon practitioners to avail to the option. Village Unit System of BRI in Indonesia Bank Rakyat Indonesia (BRI) was first established in Purwokerto, Central Java, in 1895 by Raden Arya Wirjatmadja. The bank, which was called Hulp-en Spaarbank der Inlandsche Bestuurs Ambtenaren, or Support and Savings Bank of the Indegenous civil servants, is the first stateowned bank in Indonesia. The growth of BRI is regarded as the beginning of Indonesian rural banking. After 113 years of operation, BRI still focuses its business on microbanking: making banking products and services accessible for the poor in Indonesia. The vision of BRI is to become a leading commercial bank in Indonesia which prioritizes customers satisfaction, with the following missions:
Performing the best banking activities focusing on providing services for Micro, Small, Providing excellent services for customers through widespread network, supported by Providing optimum added values for all stakeholders
and Medium Enterprises to support Indonesias economy.
professional HR by implementing GCG.
In order to achieve those missions, BRI apply such strategies as maintaining focus on the core business, expanding operational coverage, strengthening the Risk Management system, and using
proper information technology for operational efficiency. Thats why 80% of its loan portfolio is dedicated to micro, small, and medium enterprisesleaving 20% to corporate. As a public bank whose performance must satisfy the stakeholders, BRI performs very well. As of December 2008, BRIs profit was USD 5.25 billion, still the highest of all banks in Indonesia. This profit mostly comes from the Unit. Full sustainability means financial profitability. Financial profitability, in turn, brings social benefits. There is one thingtheir bold experimentwhich has been proven successful without any doubt. When we respect those living on the financial fringes of society as partners and give them the tools to utilize the economic system, they welcome the chance to find those solutions for themselves. Benefits for the working poor The obvious benefits like increasing income, being able to feed more nutritious food to their families or sending the children to school are, in some ways, the by-product of the deeper benefits, raising their self-confidence, their self-esteem. By treating customers as partners and trusting their character, it bypasses their lack of education and increases their sense of self-worth. Respecting and encouraging their dreams of a better life, BRI-Unit staff helps them attain those dreams. Benefits for communities Located in the centers of small towns, rural areas, or neighbourhoods of larger cities, BRI Units gather savings of small to medium depositors in that area. Groups such as schools, women's or youth clubs, government offices, informal savings and loan associations, or local religious institutions contribute a higher savings volume. This then supports the banking credit needs of the poor borrowers. It also provides security and better financial management to the communities.
Benefits for governments and donors

Governments and donors are freed from paying out credit subsidies to the economically active poor. Focus can shift to expanding health care, school, and food programs for the poor below the poverty line, enabling them to gradually move into the economic mainstream.
How The BRI-Unit System Can Transform Your Entire Outlook on the Possibilities and Benefits of Micro banking: Faced with closure or transformation, BRI embarked on a journey that radically altered the operating concept of the timethat the poor needed government or donor-subsidized credit programs. By stepping outside that paradigmthat set way of thinkingthe paradigm shift opened whole new possibilities for delivering microfinance services. To begin with, the economically active poor were recognized as partners, which meant we had to change our perceptions. The working poor are a vital, integral part of the economic system, operating at the edges of the 'poverty line' up to the lower ends of the middle class. The woman in the market selling vegetables, farmers raising chickens and growing rice, traders taking the rice to market, weavers, fishermen and cooks, those engaged in transportation, retail, construction and small manufacturing, all run micro to medium sized businesses. For too long, "the poor" were thought of, at the policy level, as one homogenous group with certain, set characteristics.

They don't repay their loans. They have to be trained how to handle a loan or run a business. Their so-called businesses are too marginal. Poor people don't save. It's too costly to provide banking services to the poor.
The paradigm shift came about when we asked the working poor, the micro-entrepreneurs, what they wonted in terms of financial products and services. Extensive research, development and
testing through field studies and pilot programs began. Then in 1984, BRI launched a commercial banking system to meet their needs ... not what we thought they needed. The key to this paradigm shift was the commitment to sustainability. The BRI Unit had to recover their financial and operating costs, without subsidies, and produce a profit in order to exist and to grow. BRI Units have proven over the past 20 years that creating products appropriate for the working poor with full cost recovery is not only possible, but also profitable. The new paradigm has helped millions of people save their money safely, earning interest on their deposits. Their savings provide the operating capital to offer loans and other services like money transfers, to help build micro-small-to-medium businesses in that local area. The Grameen system The Grameen system dominates the market in Bangladesh, where it has been widely imitated by a number of large and small MFI. The system was pioneered by Professor Yunus in 1976, and has grown very rapidly since. In addition to the originator, the Grameen Bank, with 2.2 million members, two other major users of the system, BRAC and Proshika, each have over a million clients, and there were in 1998 some thirty other MFIs with over 10,000 members, and many hundreds of other smaller organisations (CDF 1998). It has been estimated that some ten million people in Bangladesh receive financial services through this system. It has also been widely replicated by MFIs elsewhere, including a small number in India and in more than twenty other countries in Asia, in Africa, Latin America and also in disadvantaged rural and urban areas in North America and Europe. The Grameen Trust supports replicators with funding and technical assistance; at the end of 1999, these replicators had 420,000 clients, including about 42,000 in India (Grameen Trust, passim) Low or no-cost foreign donations represent the largest source of on-lending funds for the large MFI which use the Grameen system in Bangladesh, but members savings and the accumulated surplus from operations each contribute some 20% of the necessary funds. The interest rates vary, and it is difficult to estimate the actual rates because there are a number of fees, forced savings requirements and other charges, and the methods of calculation also differ from one institution to another. Broadly speaking, the cost to the final borrowers amounts to at least 2% per month, and often substantially more.
The Grameen system requires a dedicated special purpose organisation. The success of the weekly or occasionally fortnightly or monthly meeting routine depends on tight discipline and adherence to a regular schedule, and it is difficult for a commercial bank which also has other financial products to integrate the Grameen system into its own operations. One of the few institutions which have done this is the Islami Bank of Bangladesh. By 1998 45 of its more than 100 branches had financed over 12,000 people through groups and centres, more or less following the Grameen system (Alamgir, pp. 72-75). One important difference, however, is that this is an Islamic Bank; most of its credit is disbursed in kind, and the Bank is far more intimately involved in its clients use of their finance than Western style banks. Although loans under the group system amounted to only about a quarter of one per cent of its total portfolio in 1998, the Islami Bank intended massively to expand this approach. The SHG System The SHG system is mainly found in India, where it is used by both MFIs and banks. There also some important users in Indonesia, parts of South East Asia, Africa and elsewhere. The SHG system in India was initiated by NGOs, and is used for financial intermediation both by commercial banks and by MFIs. By April 2001 some 285,000 SHGs had taken loans from 41 Indian commercial banks, 166 regional rural banks and 111 co-operative banks. The average loan per group was about Rs 18,000 and the average loan per member was Rs 1,100, or just under twenty five dollars. During the year 2000/2001 171,000 SHGs took loans, of which 149,000 were first time borrowers. (NABARD, Micro-credit Innovations Department, personal communication). The average membership is around seventeen people per SHG, so these figures mean that about four and a half million people in India have access to formal savings facilities and loans through their SHG membership. In just one year, the number of new members was in excess of two and a half million people, or well over the total membership of even the largest institutions in Bangladesh. The formation of SHGs for savings and credit, and their linkage to commercial banks, was initiated in India by MYRADA in the mid-1980s (Fernandez 1998). MYRADA is a Non Governmental Organization managing rural development programmes in 3 States of South India
and providing on-going support including deputations of staff to programmes in 6 other States. It also promotes the Self Help Affinity strategy in Cambodia, Myanmar and Bangladesh. NABARD management had around the same time had some exposure to similar experiences in Thailand and Indonesia, and they responded favorably to MYRADAs suggestion that this could be a useful way to bring formal financial services to the rural poor. Since that time, SHG linkage has been vigorously promoted by NABARD and other institutions. It generally involves two institutions. Most NGOs do not play any financial role. They promote and train the groups, and assist them through the qualifying process of saving and internal lending. The groups are introduced to a bank to open a savings account, and later to take a loan. The NGO may remain heavily involved, assisting the members to manage their affairs, and possibly promoting higher level clusters and federations of SHGs, or it may withdraw and work with other groups. Other NGOs also act as financial intermediaries by borrowing from NABARD or elsewhere and on-lending to SHGs, either because they aim to become MFIs, or because this is often the only way by which the groups could access finance, because many bankers refused to lend to SHGs directly, or even to open savings accounts for them. The financial margin on this business is however insufficient to cover more than a small part of the transaction costs. Over a third of the linked SHGs borrowed from MFIs rather than from banks in 1998, but this proportion dropped to a quarter in 1999 and is rapidly decreasing further as banks become more aware of the business opportunity represented by SHGs (NABARD, 1998, 1999). In addition to paying the cost of training the bankers and the staff of the NGOs, NABARD also encourages the banks to lend to SHGs by refinancing the loans at the subsidised rate of six and a half per cent. This subsidised refinance was used to finance 83% of the loans made to SHGs in the year 2000/2001. (NABARD, MCID, ibid.) Loans to SHGs are excluded from the maximum interest ceiling of 12% which still applies to other loans under Rs. 20,000 (RBI 2000), but the banks have generally not taken advantage of this freedom, and most still lend to SHGs at about 12%. The resulting 5.5% spread is felt to be enough to cover the transaction costs so long as the SHG promotion, training and development task has been carried out by an NGO, at no cost to the bank. The on-time repayment rates on SHG loans are usually well over 95%. There is also a large and increasing number of MFIs in India, most of which use the SHG method. A small number of these
MFIs use the Grameen system, but the portfolio of the approximately thirty-five larger MFIs which use the SHG system, and are doing business with the recently established SIDBI Foundation for Micro-credit (SFMC), amounts to almost around 85 crores of rupees or thirteen million dollars These MFIs were said in early 2001 to be serving about 200,000 eventual clients, of whom 94% are women. (SFMC, personal communication). By contrast, the total number of people in India served by the eighteen institutions using the Grameen system at the end of 1999 was approximately fifty thousand. (Grameen Trust, 2000, pp. 72-78).
Why Grameen in Bangladesh and SHGs in India? The rural poor in India are not so different from their counterparts in Bangladesh, and the differences between Northern and Southern India, for instance, are certainly more pronounced than those between poor rural communities in West Bengal, or UP, Bihar and Orissa, from their neighbours in Bangladesh. It seems prima facie to be odd, therefore, that two such different systems have evolved, and that there are, as yet at any rate, so few examples of the SHG system in Bangladesh or of the Grameen system in India. There are a number of possible explanations. None of them is probably sufficient on its own, but they may together account for the present situation. Bangladesh has less experience of any form of democracy than India; its people are used to military governments, and may for that or other reasons be more disciplined and less individualist. The Grameen system is often criticised for being over-disciplined, or even militarist, with its tradition of saluting, of meetings with imposed seating systems and the necessity for strict adherence to pre-set schedules, by staff and members alike. It may, for that reason, be more acceptable in Bangladesh. In India, on the other hand, many NGOs see credit as an entry point for wider goals. Fernandez (2001, p. 6-7), for instance, mentions credit only as the third aspect of MYRADAs involvement in SHG promotion; the identification and strengthening of traditional, social and institutional capital are given greater emphasis. Bangladesh is a relatively homogeneous, very poor, and to the casual observer at least there seems to be little opportunity for progress. It may be an appropriate location for a rigid, institutionally autonomous, readily transferable and dependence-creating system which can alleviate poverty for large numbers.
India is fiercely diverse as a nation, and most communities are also diverse in caste, opinion and religion. Indians are also known for their sense of personal independence, which is often translated into indiscipline, whether on the roads, in political assemblies or elsewhere. The SHG system reflects this independence and diversity. It allows people to save and borrow according to their own timetable, not as the bank requires, and SHGs can also play a part in a whole range of social, commercial or other activities. They can be vehicles for social and political action as well as for financial intermediation. Size does matter when it comes to microfinance. That and the pace of expansion mark the difference between success and failure, according to a study into the industry. One out of three microfinance institutions (MFI) in India made losses in fiscal 2009, says a study of some 230 lenders conducted by ACCESS Development Services, a not-for-profit organization that offers consulting services to MFIs. The study also shows that a higher proportion, 42%, of small microfinance lenders, or those that have a loan portfolio of up to Rs5 crore, posted losses. Small does not seem to be the right size for viability, says the study, which was led by N. Srinivasan, an expert on MFIs. In fiscal 2009, MFIs recovered 99% of their loans, according to the report, which is way above the recovery of commercial banks. While MFIs lend at rates going up to 30%, the smaller ones make losses because of high operating costs, according to industry experts. For large MFIs, the cost of distributing and recovering loans are typically 40-45% of the total. The rest is the cost of fundsMFIs typically borrow from banks and other institutions at around 12% interest. But for smaller players, operating expenses, or the proportion expended in distribution and recovery, could be as high as 60% of the total. If a new lender tries to expand fast and spends a lot of money on manpower, technology and market penetration, it could face losses, says Chandra Shekhar Ghosh, managing director of
Bandhan Financial Services Pvt. Ltd, one of the biggest and most profitable MFIs in India. Operations should be scaled up gradually after building a certain amount of business. However, operations are sustainable only if a lender can raise its loan portfolio to at least Rs10 crore and that should take around two years from inception, according to Manoj K. Sharma, director of MicroSave, a consulting firm that advises MFIs. Scale is very important in microfinance. A lot also depends on lending practices as well, says Sharma. The ACCESS report says unbridled expansion tactics, and competition in some cases result in lenders offering more loans than borrowers could service, and this, in turn, leads to delinquency. For illustration, Srinivasan cites largescale defaults in Kolar district of Karnataka, where nonperforming assets (NPAs) are as high as Rs60 crore, almost half of the total NPAs of the industry. Paring transaction costs is the biggest challenge facing microfinance lenders. It isnt easy making finance available to the last man in the queue, says J.P. Dua, chairman of Allahabad Bank, which funds MFIs such as Bandhan. It also costs quite a bit. MFIs in India had nearly doubled their outstanding loan portfolio to Rs11,734 crore in fiscal 2009, according to the ACCESS report. They added 8.5 million borrowers during the year and had 22.6 million borrowers as on 31 March. The bigger players were better offin fiscal 2009, 84% of the large MFIs, or those that have a loan book of more than Rs50 crore, were profitable, and of those that have a loan portfolio of up to 50 crore, 80% were profitable.
Microfinance In India
At present lending to the economically active poor both rural and urban is pegged at around Rs 7000 crores in the Indian banks credit outstanding. As against this, according to even the most conservative estimates, the total demand for credit requirements for this part of Indian society is somewhere around Rs 2,00,000 crores. Microfinance changing the face of poor India Micro-Finance is emerging as a powerful instrument for poverty alleviation in the new economy. In India, micro-Finance scene is dominated by Self Help Groups (SHGs) - Banks linkage Programme, aimed at providing a cost effective mechanism for providing financial services to the 'unreached poor'. 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. Research across the globe has shown that, over time, microfinance clients increase their income and assets, increase the number of years of schooling their children receive, and improve the health and nutrition of their families. A more refined model of micro-credit delivery has evolved lately, which emphasizes the combined delivery of financial services along with technical assistance, and agricultural business development services. When compared to the wider SHG bank linkage movement in India, private MFIs have had limited outreach. However, we have seen a recent trend of larger microfinance institutions transforming into Non-Bank Financial Institutions (NBFCs). This changing face of microfinance in India appears to be positive in terms of the ability of microfinance to attract more funds and therefore increase outreach. In terms of demand for micro-credit or micro-finance, there are three segments, which demand funds. They are:
At the very bottom in terms of income and assets, are those who are landless and engaged in agricultural work on a seasonal basis, and manual labourers in forestry, mining, household industries, construction and transport. This segment requires, first and foremost, consumption credit during those months when they do not get labour work, and for contingencies such as illness. They also need credit for acquiring small productive assets, such as livestock, using which they can generate additional income.
The next market segment is small and marginal farmers and rural artisans, weavers and those self-employed in the urban informal sector as hawkers, vendors, and workers in household micro-enterprises. This segment mainly needs credit for working capital, a small part of which also serves consumption needs. This segment also needs term credit for acquiring additional productive assets, such as irrigation pumpsets, borewells and livestock in case of farmers, and equipment (looms, machinery) and worksheds in case of non-farm workers.
The third market segment is of small and medium farmers who have gone in for commercial crops such as surplus paddy and wheat, cotton, groundnut, and others engaged in dairying, poultry, fishery, etc. Among non-farm activities, this segment includes those in villages and slums, engaged in processing or manufacturing activity, running provision stores, repair workshops, tea shops, and various service enterprises. These persons are not always poor, though they live barely above the poverty line and also suffer from inadequate access to formal credit.
Well these are the people who require money and with Microfinance it is possible. Right now the problem is that, it is SHGs' which are doing this and efforts should be made so that the big financial institutions also turn up and start supplying funds to these people. This will lead to a better India and will definitely fulfill the dream of our late Prime Minister, Mrs. Indira Gandhi, i.e. Poverty. One of the statement is really appropriate here, which is as: Money, says the proverb makes money. When you have got a little, it is often easy to get more. The great difficulty is to get that little.Adams Smith. Today India is facing major problem in reducing poverty. About 25 million people in India are under below poverty line. With low per capita income, heavy population pressure, prevalence of massive unemployment and underemployment , low rate of capital formation , misdistribution of wealth and assets , prevalence of low technology and poor economics organization and instability of output of agriculture production and related sectors have made India one of the poor countries of the world.
Present Scenario of India: India falls under low income class according to World Bank. It is second populated country in the world and around 70 % of its population lives in rural area. 60% of people depend on agriculture, as a result there is chronic underemployment and per capita income is only $ 3262. This is not enough to provide food to more than one individual . The obvious result is abject poverty , low rate of education, low sex ratio, exploitation. The major factor account for high incidence of rural poverty is the low asset base. According to Reserve Bank of India, about 51 % of people house possess only 10% of the total asset of India .This has resulted low production capacity both in agriculture (which contribute around 22-25% of GDP ) and Manufacturing sector. Rural people have very low access to institutionalized credit( from commercial bank). Poverty alleviation programmes and concepualisation of Microfinance: There has been continuous efforts of planners of India in addressing the poverty . They Have come up with development programmes like Integrated Rural Development progamme (IRDP), National Rural Employment Programme (NREP) , Rural Labour Employment Guarantee Programme (RLEGP) etc. But these progamme have not been able to create massive impact in poverty alleviation. The production oriented approach of planning without altering the mode of production could not but result of the gains of development by owners of instrument of production. The mode of production does remain same as the owner of the instrument have low access to credit which is the major factor of production. Thus in Nineties National bank for agriculture and rural development(NABARD) launches pilot projects of Microfinance to bridge the gap between demand and supply of funds in the lower rungs of rural economy. Microfinance . the buzzing word of this decade was meant to cure the illness of rural economy. With this concept of Self Reliance, Self Sufficiency and Self Help gained momentum. The Indian microfinance is dominated by Self Help Groups (SHGs) and their linkage to Banks. Deprived of the basic banking facilities, the rural and semi urban Indian masses are still relying on informal financing intermediaries like money lenders, family members, friends etc.
2.1 Distribution of Indebted Rural Households: Agency wise Credit Agency Government Cooperative Societies Commercial banks and RRBs Insurance Provident Fund Other Institutional Sources All Institutional Agencies Landlord Agricultural Moneylenders Professional Moneylenders Relatives and Friends Others All Non Institutional Agencies All Agencies Source: Debt and Investment Survey, GoI 1992 Seeing the figures from the above table, it is evident that the share of institutional credit is much more now. The above survey result shows that till 1991, institutional credit accounted for around two-thirds of the credit requirement of rural households. This shows a comparatively better penetration of the banking and financial institutions in rural India. Percentage of Rural Households 6.1 21.6 33.7 0.3 0.7 1.6 64.0 4.0 7.0 10.5 5.5 9.0 36.0 100.0
Percentage distribution of debt among indebted Rural Labor Households by source of debt Sr. No. Source of debt Households With cultivated 1 2 3 4 5 Government Co-operative Societies Banks Employers Money lenders land 4.99 16.78 19.91 5.35 28.12
Without cultivated land 5.76 9.46 14.55 8.33 35.23
All
5.37 13.09 17.19 6.86 31.70
6 7 8
Shop-keepers Relatives/Friends Other Sources Total Round of N.S.S.) 1999-2000
6.76 14.58 3.51 100.00
7.47 15.68 3.52 100.00
7.13 15.14 3.52 100.00
Source: Rural labor enquiry report on indebtedness among rural labor households (55th
The table above reveals that most of the rural labour households prefer to raise loan from the noninstitutional sources. About 64% of the total debt requirement of these households was met by the non-institutional sources during 1999-2000. Money lenders alone provided debt (Rs.1918) to the tune of 32% of the total debt of these households as against 28% during 1993-94. Relatives and friends and shopkeepers have been two other sources which together accounted for about 22% of the total debt at all-India level. The institutional sources could meet only 36% of the total credit requirement of the rural labour households during 1999-2000 with only one percent increase over the previous survey in 1993-94. Among the institutional sources of debt, the banks continued to be the single largest source of debt meeting about 17 percent of the total debt requirement of these households. In comparison to the previous enquiry, the dependence on co-operative societies has increased considerably in 19992000. During 1999-2000 as much as 13% of the debt was raised from this source as against 8% in 1993-94. However, in the case of the banks and the government agencies it decreased marginally from 18.88% and 8.27% to 17.19% and 5.37% respectively during 1999-2000 survey. 2.2 Relative share of Borrowing of Cultivator Households (in per cent) Sources of Credit Non Institutional Of which: Moneylenders Institutional Of which: Cooperative Societies,etc Commercial banks Unspecified Total 1951 92.7 69.7 7.3 3.3 0.9 100.0 1961 81.3 49.2 18.7 2.6 0.6 100.0 1971 68.3 36.1 31.7 22.0 2.4 100.0 1981 36.8 16.1 63.2 29.8 28.8 100.0 1991 30.6 17.5 66.3 30.0 35.2 3.1 100.0 2002* 38.9 26.8 61.1 30.2 26.3 100.0
* All India Debt and Investment Survey, NSSO, 59th round, 2003
Source: All India Debt and Investment Surveys Table shows the increasing influence of moneylenders in the last decade. The share of moneylenders in the total non institutional credit was declining till 1981, started picking up from the 1990s and reached 27 per cent in 2001. At the same time the share of commercial banks in institutional credit has come down by almost the same percentage points during this period. Though, the share of cooperative societies is increasing continuously, the growth has flattened during the last three decades.
2.3 Distribution based on Asset size of Rural Households (in per cent) Household Assets (Rs 000) Less than 5 5-10 10-20 20-30 30-50 50-70 70-100 100-150 150-250 250 and above All classes Institutional Agency 42 47 44 68 55 53 61 61 68 81 66 Non-Institutional Agency 58 53 56 32 45 47 39 39 32 19 34 All 100 100 100 100 100 100 100 100 100 100 100
Source: Debt and Investment Survey, GoI, 1992 The households with a lower asset size were unable to find financing options from formal credit disbursement sources. This was due to the requirement of physical collateral by banking and financial institutions for disbursing credit. For households with less than Rs 20,000 worth of
physical assets, the most convenient source of credit was non institutional agencies like landlords, moneylenders, relatives, friends, etc. Looking at the findings of the study commissioned by Asia technical Department of the World Bank (1995), the purpose or the reason behind taking credit by the rural poor was consumption credit, savings, production credit and insurance. Consumption credit constituted two-thirds of the credit usage within which almost three-fourths of the demand was for short periods to meeting emergent needs such as illness and household expenses during the lean season. Almost entire demand for the consumption credit was met by informal sources at high to exploitive interest rates that varied from 30 to 90 per cent per annum. Almost 75 per cent of the production credit (which accounted for about one-third of the total credit availed of by the rural masses) was met by the formal sector, mainly banks and cooperatives. 2.4 Banking Expansion Starting in the late 1960s, India was the home to one of the largest state interventions in the rural credit market. This phase is known as the Social Banking phase. It witnessed the nationalization of existing private commercial banks, massive expansion of branch network in rural areas, mandatory directed credit to priority sectors of the economy, subsidized rates of interest and creation of a new set of regional rural banks (RRBs) at the district level and a specialized apex bank for agriculture and rural development (NABARD) at the national level. The Net State Domestic Product (NSDP) is a measure of the economic activity in the state and comparing it with the utilization of bank credit or bank deposits indicates how much economic activity is being financed by the banks and whether there exists untapped potential for increasing deposits in that state. E.g. In the year 2003-2004 the percentage of bank deposits to NSDP is pretty high at around 75%-80% in Bihar and Jharkhand or these states are not as under banked as thought to be. 2.5 Microfinance Social Aspects
Micro financing institutions significantly contributed to gender equality and womens empowerment as well as poor development and civil society strengthening. Contribution to womens ability to earn an income led to their economic empowerment, increased well being of women and their families and wider social and political empowerment. Microfinance programs targeting women became a major plank of poverty alleviation and gender strategies in the 1990s. Increasing evidence of the centrality of gender equality to poverty reduction and womens higher credit repayment rates led to a general consensus on the desirability of targeting women. The Need in India
India is said to be the home of one third of the worlds poor; official estimates range from 26 to 50 percent of the more than one billion population. About 87 percent of the poorest households do not have access to credit. The demand for microcredit has been estimated at up to $30 billion; the supply is less than $2.2 billion combined by all involved in the sector.
Due to the sheer size of the population living in poverty, India is strategically significant in the global efforts to alleviate poverty and to achieve the Millennium Development Goal of halving the worlds poverty by 2015. Microfinance has been present in India in one form or another since the 1970s and is now widely accepted as an effective poverty alleviation strategy. Over the last five years, the microfinance industry has achieved significant growth in part due to the participation of commercial banks. Despite this growth, the poverty situation in India continues to be challenging. Some principles that summarize a century and a half of development practice were encapsulated in 2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by the Group of Eight leaders at the G8 Summit on June 10, 2004: Poor people need not just loans but also savings, insurance and money transfer services. Microfinance must be useful to poor households: helping them raise income, build up assets and/or cushion themselves against external shocks.
Microfinance can pay for itself. Subsidies from donors and government are scarce and uncertain, and so to reach large numbers of poor people, microfinance must pay for itself.
Microfinance means building permanent local institutions. Microfinance also means integrating the financial needs of poor people into a countrys mainstream financial system. The job of government is to enable financial services, not to provide them. Donor funds should complement private capital, not compete with it. The key bottleneck is the shortage of strong institutions and managers. Donors should focus on capacity building. Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs, which chokes off the supply of credit. Microfinance institutions should measure and disclose their performance both financially and socially.
Microfinance can also be distinguished from charity. It is better to provide grants to families who are destitute, or so poor they are unlikely to be able to generate the cash flow required to repay a loan. This situation can occur for example, in a war zone or after a natural disaster. Financial needs and Financial services In developing economies and particularly in the rural areas, many activities that would be classified in the developed world as financial are not monetized: that is, money is not used to carry them out. Almost by definition, poor people have very little money. But circumstances often arise in their lives in which they need money or the things money can buy. In Stuart Rutherfords recent book The Poor and Their Money, he cites several types of needs:
Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding, widowhood, old age. Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death.
Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of dwellings. Investment Opportunities: expanding a business, buying land or equipment, improving housing, securing a job (which often requires paying a large bribe), etc.
Poor people find creative and often collaborative ways to meet these needs, primarily through creating and exchanging different forms of non-cash value. Common substitutes for cash vary from country to country but typically include livestock, grains, jewellery and precious metals. As Marguerite Robinson describes in The Microfinance Revolution, the 1980s demonstrated that microfinance could provide large-scale outreach profitably, and in the 1990s, microfinance began to develop as an industry. In the 2000s, the microfinance industrys objective is to satisfy the unmet demand on a much larger scale, and to play a role in reducing poverty. While much progress has been made in developing a viable, commercial microfinance sector in the last few decades, several issues remain that need to be addressed before the industry will be able to satisfy massive worldwide demand. The obstacles or challenges to building a sound commercial microfinance industry include: Inappropriate donor subsidies Poor regulation and supervision of deposit-taking MFIs Few MFIs that mobilize savings Limited management capacity in MFIs Institutional inefficiencies Need for more dissemination and adoption of rural, agricultural microfinance methodologies Legal Regulations Banks in India are regulated and supervised by the Reserve Bank of India (RBI) under the RBI Act of 1934, Banking Regulation Act, Regional Rural Banks Act, and the Cooperative Societies Acts of the respective state governments for cooperative banks.
NBFCs are registered under the Companies Act, 1956 and are governed under the RBI Act. There is no specific law catering to NGOs although they can be registered under the Societies Registration Act, 1860, the Indian Trust Act, 1882, or the relevant state acts. There has been a strong reliance on self-regulation for NGO MFIs and as this applies to NGO MFIs mobilizing deposits from clients who also borrow. This tendency is a concern due to enforcement problems that tend to arise with self-regulatory organizations. In January 2000, the RBI essentially created a new legal form for providing microfinance services for NBFCs registered under the Companies Act so that they are not subject to any capital or liquidity requirements if they do not go into the deposit taking business. Absence of liquidity requirements is concern to the safety of the sector.
Comparative
Analysis
of
Micro-finance
Services
offered
to
the
poor
Source: R. Arunachalam - Alternative Technologies in the Indian Micro- finance Industry Micro Finance Models 1. Micro Finance Institutions (MFIs):
MFIs are an extremely heterogeneous group comprising NBFCs, societies, trusts and cooperatives. They are provided financial support from external donors and apex institutions including the Rashtriya Mahila Kosh (RMK), SIDBI Foundation for micro-credit and NABARD and employ a variety of ways for credit delivery. Since 2000, commercial banks including Regional Rural Banks have been providing funds to MFIs for on lending to poor clients. Though initially, only a handful of NGOs were into financial intermediation using a variety of delivery methods, their numbers have increased considerably today. While there is no published data on private MFIs operating in the country, the number of MFIs is estimated to be around 800. Legal Forms of MFIs in India Types of MFIs 1. Not for Profit MFIs a.) NGO - MFIs b.) Non-profit Companies 2. Mutual Benefit 10 MFIs 200 to 250 Estimated Number* 400 to 500 Legal Acts under which Registered Societies Registration Act, 1860 or similar Provincial Acts Indian Trust Act, 1882 Section 25 of the Companies Act, 1956 Mutually Aided Cooperative Societies Act enacted by State Government
a.) Mutually Aided Cooperative Societies (MACS) and similarly set up institutions 3. For Profit MFIs a.) Non-Banking Financial 700 - 800 6
Indian Companies Act, 1956 Reserve Bank of India Act, 1934
Companies (NBFCs) Total
Source: NABARD website
2. Bank Partnership Model

This model is an innovative way of financing MFIs. The bank is the lender and the MFI acts as an agent for handling items of work relating to credit monitoring, supervision and recovery. In other words, the MFI acts as an agent and takes care of all relationships with the client, from first contact to final repayment. The model has the potential to significantly increase the amount of funding that MFIs can leverage on a relatively small equity base. A sub - variation of this model is where the MFI, as an NBFC, holds the individual loans on its books for a while before securitizing them and selling them to the bank. Such refinancing through securitization enables the MFI enlarged funding access. If the MFI fulfils the true sale criteria, the exposure of the bank is treated as being to the individual borrower and the prudential exposure norms do not then inhibit such funding of MFIs by commercial banks through the securitization structure. 3. Banking Correspondents The proposal of banking correspondents could take this model a step further extending it to savings. It would allow MFIs to collect savings deposits from the poor on behalf of the bank. It would use the ability of the MFI to get close to poor clients while relying on the financial strength of the bank to safeguard the deposits. This regulation evolved at a time when there were genuine fears that fly-by-night agents purporting to act on behalf of banks in which the people have confidence could mobilize savings of gullible public and then vanish with them. It remains to be seen whether the mechanics of such relationships can be worked out in a way that minimizes the risk of misuse. 4. Service Company Model Under this model, the bank forms its own MFI, perhaps as an NBFC, and then works hand in hand with that MFI to extend loans and other services. On paper, the model is similar to the partnership model: the MFI originates the loans and the bank books them. But in fact, this model has two very different and interesting operational features: (a) The MFI uses the branch network of the bank as its outlets to reach clients. This allows the client to be reached at lower cost than in the case of a standalone MFI. In case of banks which have large branch networks, it also allows rapid scale up. In the partnership model, MFIs may contract with many banks in an arms length relationship. In the service company model, the MFI
works specifically for the bank and develops an intensive operational cooperation between them to their mutual advantage. (b) The Partnership model uses both the financial and infrastructure strength of the bank to create lower cost and faster growth. The Service Company Model has the potential to take the burden of overseeing microfinance operations off the management of the bank and put it in the hands of MFI managers who are focused on microfinance to introduce additional products, such as individual loans for SHG graduates, remittances and so on without disrupting bank operations and provide a more advantageous cost structure for microfinance.
Examples of Recent Innovations in Financial Services for the Poor In India: ICICI Bank (India): Two state banks in India (Corporation and Canara) partnered with an NGO to provide salaried low-income workers with access to savings. The project uses the already established automatic teller machines (ATMs) in the factories to offer a recurring savings product, along with education on personal finance.
Microfinance securitization Share, a Grameen Bank replicator, has been one the leading MFIs in India with a good track record, growth rate and scale of operation. In two transactions with Share, ICICI Bank has securitized the receivables of microfinance loans from Share amounting to $5.25 million consisting of loans made by Share to microfinance clients. ICICI Bank bought this microfinance loan portfolio against: A consideration calculated by computing the NPV of receivables amounting to $5.25 million at an agreed discount rate. Partial credit protection provided by Share to ICICI Bank in the form of a first loss default guarantee amounting to 8 per cent of the receivables under the portfolio. Subsequently, ICICI Bank sold the securitized portfolio to a private sector bank in India BASIX is a livelihood promotion institution established in 1996, working with over a million and a half customers, over 90% being rural poor households and about 10% urban slum dwellers. BASIX works in 16 states - Andhra Pradesh, Karnataka, Orissa, Jharkhand, Maharashtra, Madhya
Pradesh, Tamilnadu, Rajasthan, Bihar, Chattisgarh, West Bengal, Delhi, Uttarakhand, Sikkim, Meghalaya and Assam and over 22,400 villages. BASIX mission is to promote a large number of sustainable livelihoods, including for the rural poor and women, through the provision of financial services and technical assistance in an integrated manner. BASIX will strive to yield a competitive rate of return to its investors so as to be able to access mainstream capital and human resources on a continuous basis. BASIX strategy is to provide a comprehensive set of livelihood promotion services which inlcude Financial Inclusion Services (FINS), Agricultural / Business Development Services (Ag/BDS) and Institutional Development Services (IDS) to rural poor households under one umbrella. BASIX in India reduced transportation and transaction costs for its clients and decreased staff expenses by establishing tellers in manned phone booths operating in India. The company operating the phone booths receives a service fee and phone booth operators are being trained in basic collection operations and accounting. BASIX is currently redesigning the project after the pilot and preparing it for relaunching.
MFIs could play a significant role in facilitating inclusion, as they are uniquely positioned in reaching out to the rural poor. Many of them operate in a limited geographical area, have a greater understanding of the issues specific to the rural poor, enjoy greater acceptability amongst the rural poor and have flexibility in operations providing a level of comfort to their clientele. There are several legal forms of MFIs. However, firm data regarding the number of MFIs operating under different forms is not available. It is roughly estimated that there are about 1,000 NGO-MFIs and more than 20 Company MFIs. Further, in Andhra Pradesh, nearly 30,000 cooperative organizations are engaged in MF activities. However, the company MFIs are major players accounting for over 80% of the microfinance loan portfolio. An attempt is made in the following table to capture the various forms of MFIs: Microfinance companies in India
Microfinance companies are the financial institutions that offer small-scale financial services in both the forms credit and savings, especially to the poor in rural, semi-urban and urban areas. These financial services are meant to help them in undertaking economic activities, mitigating vulnerabilities to income shocks, smoothening consumption, increasing savings and supporting self-empowerment. There are a number of microfinance companies in India, which play some pivotal roles to the development of India.
India's microfinance sector is fragmented with more than 3000 microfinance companies (MGIs), NGOs and NGO-MFIs. The top 10 microfinance companies in India are estimated to account for almost 74 per cent of the total loans outstanding. It can be added here that the total loan outstanding of Indian microfinance sector lies between Rs. 160-175 billion. As on March 31, 2009, almost 17 Indian microfinance companies have more Rs. 1 million outstanding loans. List of Top Microfinance Companies in India SKS Microfinance Ltd (SKSMPL) Spandana Sphoorty Financial Ltd (SSFL) Share Microfin Limited (SML) Asmitha Microfin Ltd (AML) Shri Kshetra Dharmasthala Rural Development Project (SKDRDP) Bhartiya Samruddhi Finance Limited (BSFL) Bandhan Cashpor Micro Credit (CMC) Grama Vidiyal Micro Finance Pvt Ltd (GVMFL) Grameen Financial Services Pvt Ltd (GFSPL)
Impact of the SHG Bank Linkage Programme Given the quantitative achievements, what has been the impact of the programme. The main findings are that: i. microfinance has reduced the incidence of poverty through increase in income, enabled the poor to build assets and thereby reduce their vulnerability. ii. It has enabled households that have access to it to spend more on education than nonclient households. Families participating in the programme have reported better school attendance and lower drop out rates. iii. It has empowered women by enhancing their contribution to household income, increasing the value of their assets and generally by giving them better control over decisions that affect their lives. iv. In certain areas it has reduced child mortality, improved maternal health and the ability of the poor to combat disease through better nutrition, housing and health especially among women and children. v. It has contributed to a reduced dependency on informal money lenders and other noninstitutional sources. vi. It has facilitated significant research into the provision of financial services for the poor and helped in building capacity at the SHG level. vii. Finally it has offered space for different stakeholders to innovate, learn and replicate. As a result, some NGOs have added micro-insurance products to their portfolios, a couple of federations have experimented with undertaking livelihood activities and grain banks have been successfully built into the SHG model in the eastern region. SHGs in some areas have employed local accountants for keeping their books; and IT applications are now being explored by almost all for better MIS, accounting and internal controls.
Marketing of Microfinance Products 1. Contract Farming and Credit Bundling Banks and financial institutions have been partners in contract farming schemes, set up to enhance credit. Basically, this is a doable model. Under such an arrangement, crop loans can be extended under tie-up arrangements with corporate for production of high quality produce with stable marketing arrangements provided and only, provided the price setting mechanism for the farmer is appropriate and fair. 2. Agri Service Centre Rabo India Rabo India Finance Pvt Ltd. has established agri-service centres in rural areas in cooperation with a number of agri-input and farm services companies. The services provided are similar to those in contract farming, but with additional flexibility and a wider range of products including inventory finance. Besides providing storage facilities, each centre rents out farm machinery, provides agricultural inputs and information to farmers, arranges credit, sells other services and provides a forum for farmers to market their products. 3. Non Traditional Markets Similarly, Mother Dairy Foods Processing, a wholly owned subsidiary of National Dairy Development Board (NDDB) has established auction markets for horticulture producers in Bangalore. The operations and maintenance of the market is done by NDDB. The project, with an outlay of Rs.15 lakh, covers 200 horticultural farmers associations with 50,000 grower members for wholesale marketing. Their produce is planned with production and supply assurance and provides both growers and buyers a common platform to negotiate better rates. 4. Apni Mandi
Another innovation is that of The Punjab Mandi Board, which has experimented with a farmers market to provide small farmers located in proximity to urban areas, direct access to consumers by elimination of middlemen. This experiment known as "Apni Mandi" belongs to both farmers and consumers, who mutually help each other. Under this arrangement a sum of Rs. 5.2 lakh is spent for providing plastic crates to 1000 farmers. Each farmer gets 5 crates at a subsidized rate. At the mandi site, the Board provides basic infrastructure facilities. At the farm level, extension services of different agencies are pooled in. These include inputs subsidies, better quality seeds and loans from Banks. Apni Mandi scheme provides self-employment to producers and has eliminated social inhibitions among them regarding the retail sale of their produce. Success Factors of Micro-Finance in India Over the last ten years, successful experiences in providing finance to small entrepreneur and producers demonstrate that poor people, when given access to responsive and timely financial services at market rates, repay their loans and use the proceeds to increase their income and assets. This is not surprising since the only realistic alternative for them is to borrow from informal market at an interest much higher than market rates. Community banks, NGOs and grass root savings and credit groups around the world have shown that these microenterprise loans can be profitable for borrowers and for the lenders, making microfinance one of the most effective poverty reducing strategies. A. For NGOs 1. The field of development itself expands and shifts emphasis with the pull of ideas, and NGOs perhaps more readily adopt new ideas, especially if the resources required are small, entry and exit are easy, tasks are (perceived to be) simple and peoples acceptance is high all characteristics (real or presumed) of microfinance. 2. Canvassing by various actors, including the National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), Friends of Womens World Banking (FWWB), Rashtriya Mahila Kosh (RMK), Council for Advancement of Peoples Action and Rural Technologies (CAPART), Rashtriya Gramin
Vikas Nidhi (RGVN), various donor funded programmes especially by the International Fund for Agricultural Development (IFAD), United Nations Development Programme (UNDP), World Bank and Department for International Development, UK (DFID)], and lately commercial banks, has greatly added to the idea pull. Induced by the worldwide focus on microfinance, donor NGOs too have been funding microfinance projects. One might call it the supply push. 3. All kinds of things from khadi spinning to Nadep compost to balwadis do not produce such concrete results and sustained interest among beneficiaries as microfinance. Most NGO-led microfinance is with poor women, for whom access to small loans to meet dire emergencies is a valued outcome. Thus, quick and high customer satisfaction is the USP that has attracted NGOs to this trade. 4. The idea appears simple to implement. The most common route followed by NGOs is promotion of SHGs. It is implicitly assumed that no technical skill is involved. Besides, external resources are not needed as SHGs begin with their own savings. Those NGOs that have access to revolving funds from donors do not have to worry about financial performance any way. The chickens will eventually come home to roost but in the first flush, it seems all so easy. 5. For many NGOs the idea of organising forming a samuha has inherent appeal. Groups connote empowerment and organising women is a double bonus. 6. Finally, to many NGOs, microfinance is a way to financial sustainability. Especially for the medium-to-large NGOs that are able to access bulk funds for on-lending, for example from SIDBI, the interest rate spread could be an attractive source of revenue than an uncertain, highly competitive and increasingly difficult-to-raise donor funding. B. For Financial Institutions and banks
Microfinance has been attractive to the lending agencies because of demonstrated sustainability and of low costs of operation. Institutions like SIDBI and NABARD are hard nosed bankers and would not work with the idea if they did not see a long term engagement which only comes out of sustainability (that is economic attractiveness).
On the supply side, it is also true that it has all the trappings of a business enterprise, its output is tangible and it is easily understood by the mainstream. This also seems to sound nice to the government, which in the post liberalisation era is trying to explain the logic of every rupee spent. That is the reason why microfinance has attracted mainstream institutions like no other developmental project. Perhaps the most important factor that got banks involved is what one might call the policy push. Given that most of our banks are in the public sector, public policy does have some influence on what they will or will not do. In this case, policy was followed by diligent, if meandering, promotional work by NABARD. The policy change about a decade ago by RBI to allow banks to lend to SHGs was initially followed by a seven-page memo by NABARD to all bank chairmen, and later by sensitisation and training programmes for bank staff across the country. Several hundred such programmes were conducted by NGOs alone, each involving 15 to 20 bank staff, all paid for by NABARD. The policy push was sweetened by the NABARD refinance scheme that offers much more favourable terms (100% refinance, wider spread) than for other rural lending by banks. NABARD also did some system setting work and banks lately have been given targets. The canvassing, training, refinance and close follow up by NABARD has resulted in widespread bank involvement. Moreover, for banks the operating cost of microfinance is perhaps much less than for pure MFIs. The banks already have a vast network of branches. To the extent that an NGO has already promoted SHGs and the SHG portfolio is performing better than the rest of the rural (if not the entire) portfolio, microfinance via SHGs in the worst case would represent marginal addition to cost and would often reduce marginal cost through better capacity utilisation. In the process the bank also earns brownie points with policy makers and meets its priority sector targets. It does not take much analysis to figure out that the market for financial services for the 50-60 million poor households of India, coupled with about the same number who are technically above the poverty line but are severely under-served by the financial sector, is a very large one. Moreover, as in any emerging market, though the perceived risks are higher, the spreads are much greater. The traditional commercial markets of corporates, business, trade, and now even housing
and consumer finance are being sought by all the banks, leading to price competition and wafer thin spreads. Further, bank-groups are motivated by a number of cross-selling opportunities in the market, for deposits, insurance, remittances and eventually mutual funds. Since the larger banks are offering all these services now through their group companies, it becomes imperative for them to expand their distribution channels as far and deep as possible, in the hope of capturing the entire financial services business of a household. Finally, both agri-input and processing companies such as EID Parry, fast-moving consumer goods (FMCG) companies such as Hindustan Levers, and consumer durable companies such as Philips have realised the potential of this big market and are actively using SHGs as entry points. Some amount of free-riding is taking place here by companies, for they are using channels which were built at a significant cost to NGOs, funding agencies and/or the government. On the whole, the economic attractiveness of microfinance as a business is getting established and this is a sure step towards mainstreaming. We know that mainstreaming is a mixed blessing, and one tends to exchange scale at the cost of objectives. So it needs to be watched carefully.
Real life Example : Lakshmi, a 22-year-old school dropout, lived in a remote village of Tamil Nadu. Instead of getting married and starting a family like any other village girl of her age in India, she wanted to set up on her own business. Lakshmi started an Internet kiosk in her village, offering services like e-mail, Internet chat and tips on health and education. The kiosk was partially financed by ICICI Bank and was set up in association with n-Logue Communications. Latha, a 29-year-old married woman with three children borrowed Rs.18,000 to set up a small provision store in Kothaipalli, a small village, in the north of Andhra Pradesh. Within a year, she started earning Rs.3500 a month from the store. With this money, she was able to provide her children a good education at a local private school. She
was a part of a self help group in Andhra Pradesh which received financial assistance from ICICI Bank. These are real-life examples to illustrate how the micro-lending initiatives of ICICI Bank affected the lives of poor women in India. By becoming a part of self-help groups, several rural women were able to move out of poverty. Apart from financial benefits, the initiatives helped the women to develop self confidence, improve their communication skills and raise their position in society. By becoming a part of self-help groups, several rural women were able to move out of poverty. Apart from financial benefits, the initiatives helped the women to develop self confidence, improve their communication skills and raise their position in society. Issues in Microfinance 1. Sustainability The first challenge relates to sustainability. MFI model is comparatively costlier in terms of delivery of financial services. An analysis of 36 leading MFIs by Jindal & Sharma shows that 89% MFIs sample were subsidy dependent and only 9 were able to cover more than 80% of their costs. This is partly explained by the fact that while the cost of supervision of credit is high, the loan volumes and loan size is low. It has also been commented that MFIs pass on the higher cost of credit to their clients who are interest insensitive for small loans but may not be so as loan sizes increase. It is, therefore, necessary for MFIs to develop strategies for increasing the range and volume of their financial services. 2. Lack of Capital The second area of concern for MFIs, which are on the growth path, is that they face a paucity of owned funds. This is a critical constraint in their being able to scale up. Many of the MFIs are socially oriented institutions and do not have adequate access to financial capital. As a result they have high debt equity ratios. Presently, there is no reliable mechanism in the country for meeting the equity requirements of MFIs. The IPO issue by Mexico based Compartamos was not accepted by purists as they thought it defied the mission of an MFI. The IPO also brought forth the issue of valuation of an MFI.
The book value multiple is currently the dominant valuation methodology in microfinance investments. In the case of start up MFIs, using a book value multiple does not do justice to the underlying value of the business. Typically, start ups are loss making and hence the book value continually reduces over time until they hit break even point. A book value multiplier to value start ups would decrease the value as the organization uses up capital to build its business, thus accentuating the negative rather than the positive. 3. Financial service delivery Another challenge faced by MFIs is the inability to access supply chain. This challenge can be overcome by exploring synergies between microfinance institutions with expertise in credit delivery and community mobilization and businesses operating with production supply chains such as agriculture. The latter players who bring with them an understanding of similar client segments, ability to create microenterprise opportunities and willingness to nurture them, would be keen on directing microfinance to such opportunities. This enables MFIs to increase their client base at no additional costs. Those businesses that procure from rural India such as agriculture and dairy often identify finance as a constraint to value creation. Such businesses may find complementarities between an MFIs skills in management of credit processes and their own strengths in supply chain management. ITC Limited, with its strong supply chain logistics, rural presence and an innovative transaction platform, the e-choupal, has started exploring synergies with financial service providers including MFIs through pilots with vegetable vendors and farmers. Similarly, large FIs such as Spandana foresee a larger role for themselves in the rural economy ably supported by value creating partnerships with players such as Mahindra and Western Union Money Transfer. ITC has initiated a pilot project called pushcarts scheme along with BASIX (a microfinance organization in Hyderabad). Under this pilot, it works with twenty women head load vendors selling vegetables of around 10- 15 kgs per day. BASIX extends working capital loans of Rs.10,000/- , capacity building and business development support to the women. ITC provides support through supply chain innovations by:
1. Making the Choupal Fresh stores available to the vendors, this avoids the hassle of bargaining and unreliability at the traditional mandis (local vegetable markets). The women are able to replenish the stock from the stores as many times in the day as required. This has positive implications for quality of the produce sold to the end consumer. 2. Continuously experimenting to increase efficiency, augmenting incomes and reducing energy usage across the value chain. For instance, it has forged a partnership with National Institute of Design (NID), a pioneer in the field of design education and research, to design user-friendly pushcarts that can reduce the physical burden. 3. Taking lessons from the pharmaceutical and telecom sector to identify technologies that can save energy and ensure temperature control in push carts in order to maintain quality of the vegetables throughout the day. The model augments the incomes of the vendors from around Rs.30-40 per day to an average of Rs.150 per day. From an environmental point of view, push carts are much more energy efficient as opposed to fixed format retail outlets. 4. HR Issues Recruitment and retention is the major challenge faced by MFIs as they strive to reach more clients and expand their geographical scope. Attracting the right talent proves difficult because candidates must have, as a prerequisite, a mindset that fits with the organizations mission. Many mainstream commercial banks are now entering microfinance, who are poaching staff from MFIs and MFIs are unable to retain them for other job opportunities. 85% of the poorest clients served by microfinance are women. However, women make up less than half of all microfinance staff members, and fill even fewer of the senior management roles. The challenge in most countries stems from cultural notions of womens roles, for example, while women are single there might be a greater willingness on the part of womens families to let them work as front line staff, but as soon as they marry and certainly once they start having children, it becomes unacceptable. Long distances and long hours away from the family are difficult for women to accommodate and for their families to understand.
5. Microinsurance
First big issue in the microinsurance sector is developing products that really respond to the needs of clients and in a way that is commercially viable. Secondly, there is strong need to enhance delivery channels. These delivery channels have been relatively weak so far. Microinsurance companies offer minimal products and do not want to go forward and offer complex products that may respond better. Microinsurance needs a delivery channel that has easy access to the low-income market, and preferably one that has been engaged in financial transactions so that they have controls for managing cash and the ability to track different individuals. Thirdly, there is a need for market education. People either have no information about microinsurance or they have a negative attitude towards it. We have to counter that. We have to somehow get people - without having to sit down at a table - to understand what insurance is, and why it benefits them. That will help to demystify microinsurance so that when agents come, people are willing to engage with them. 6. Adverse selection and moral hazard The joint liability mechanism has been relied upon to overcome the twin issues of adverse selection and moral hazard. The group lending models are contingent on the availability of skilled resources for group promotion and entail a gestation period of six months to one year. However, there is not sufficient understanding of the drivers of default and credit risk at the level of the individual. This has constrained the development of individual models of micro finance. The group model was an innovation to overcome the specific issue of the quality of the portfolio, given the inability of the poor to offer collateral. However, from the perspective of scaling up micro financial services, it is important to proactively discover models that will enable direct finance to individuals.
Conclusion
We can conclude that an integrated approach to servicing clients can enhance microfinances effectiveness as a poverty alleviation tool. The benefits of this approach are twofold. First, by acting as a platform to deliver important social services along with credit and financial services, MFIs can contribute to greater sustainability at the client level. Integrating microfinance with social services such as health, education and natural disaster relief or prevention addresses the other contributing factors to poverty beyond the economic factor. In doing so, it is necessary to provide clients with a comprehensive solution to minimize the risks they face. By addressing the very issues that inhibit a clients chances of succeeding with microfinance, microfinance can increase its overall efficacy. Focusing on client sustainability instead of institutional sustainability is how the field can ensure that MFIs are not just reaching more individuals, but that they are providing them with the services they really need once they do reach them, and that they accompany them throughout their journey to economic freedom. Second, using microfinance as a platform to offer integrated services increases economies of scope for all the organizations involved in trying to service the same base of clienteles. With leveraged resources assets, infrastructure, knowledge, distribution channels, etc. MFIs can increase the capacity of the service offerings to reach more clients and to reach them more effectively. By partnering with other critical social providers and businesses and serving as a platform, microfinance can offer other organizations with a distribution channel to reach individuals in need, share experiences in working in a particular region and community, and offer countless other tangible and intangible products and services. This only makes sense because microfinance is not in the business of maximizing profits but rather of maximizing lives touched and transformed. It encourage microfinance institutions to follow in the steps of pioneers, such as the Grameen Bank, BRAC, Pro Mujer, Fonkoze and Sareeram, in offering integrated services to their clients and to partner wherever it makes sense. The fight to alleviate poverty is too great a task for anyone or any one discipline to combat it alone. As an entrenched and recognized leader in this mission, microfinance can serve as a bridge beyond banking and development. It can be the link that brings together the services and products available today to the people who need them most. Only through a collective effort will they have the best chance of succeeding.
Bibliography
www.google.com- microfinance, its origin, scenario in India, development of microfinance www.wikipedia.com www.ivpbri.com

Microfinance- A Critical Analysis

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Index

1 MICROFINANCE-A CRITICAL ANALYSIS

2 MICROFINANCE-A CRITICAL ANALYSIS

5 MICROFINANCE-A CRITICAL ANALYSIS

6 MICROFINANCE-A CRITICAL ANALYSIS

10 MICROFINANCE-A CRITICAL ANALYSIS

14 MICROFINANCE-A CRITICAL ANALYSIS

15 MICROFINANCE-A CRITICAL ANALYSIS

16 MICROFINANCE-A CRITICAL ANALYSIS

and Medium Enterprises to support Indonesias economy.

professional HR by implementing GCG.

Benefits for governments and donors

25 MICROFINANCE-A CRITICAL ANALYSIS

26 MICROFINANCE-A CRITICAL ANALYSIS

29 MICROFINANCE-A CRITICAL ANALYSIS

Without cultivated land 5.76 9.46 14.55 8.33 35.23

5.37 13.09 17.19 6.86 31.70

30 MICROFINANCE-A CRITICAL ANALYSIS

Shop-keepers Relatives/Friends Other Sources Total Round of N.S.S.) 1999-2000

6.76 14.58 3.51 100.00

7.47 15.68 3.52 100.00

7.13 15.14 3.52 100.00

35 MICROFINANCE-A CRITICAL ANALYSIS

37 MICROFINANCE-A CRITICAL ANALYSIS

Indian Companies Act, 1956 Reserve Bank of India Act, 1934

Companies (NBFCs) Total

Source: NABARD website

2. Bank Partnership Model

42 MICROFINANCE-A CRITICAL ANALYSIS

43 MICROFINANCE-A CRITICAL ANALYSIS

44 MICROFINANCE-A CRITICAL ANALYSIS

47 MICROFINANCE-A CRITICAL ANALYSIS

53 MICROFINANCE-A CRITICAL ANALYSIS

54 MICROFINANCE-A CRITICAL ANALYSIS

55 MICROFINANCE-A CRITICAL ANALYSIS

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