Table of Contents Chapter 1-Introduction.....................3 1.1 Microfinance Definition3 1.2 Strategic Policy Initiatives.4 1.3 Activities in Microfinance.4 1.

4 Legal Regulations..5 Chapter 2-Micro-Finance in India...............................................................................................6 2.1 Distri ution of In!e te! Rural "ouse#ol!s$ Agency %ise& 2.2 Relative s#are of 'orro%ing of (ultivator "ouse#ol!s.) 2.3 Distri ution ase! on Asset si*e of Rural "ouse#ol!s..+ 2.4 'an,ing -./ansion..10 2.5 Microfinance Social As/ects...........................................11 Chapter 3- Self Help roups..12

3.1 "o% self1#el/ grou/s %or,.12 3.2 Sources of ca/ital an! lin,s et%een S"2s an! 'an,s...13 3.3 "o% S"2s save...13 3.4 S"2s1'an, Lin,age Mo!el.14 3.5 Life insurances for self1#el/ grou/ 3e3 ers..1& Chapter !-Microfinance Models.14 Chapter "- #ole$ Functions and %or&in' Mechanis( of Financial Institutions...20 5.1 I(I(I 'an,...20 5.2 'an!#an...24 5.3 2ra3een 'an,.2& 5.4 S5S Microfinance24
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Chapter 6- Mar&etin' of Microfinance )roducts.2+ Chapter *- Success Factors of Microfinance in India...31 Chapter +- Issues related to Microfinance in India..35 #eferences.3+

Chapter 1, Introduction
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Microfinance is !efine! as any activity t#at inclu!es t#e /rovision of financial services suc# as cre!it6 savings6 an! insurance to lo% inco3e in!ivi!uals %#ic# fall 7ust a ove t#e nationally !efine! /overty line6 an! /oor in!ivi!uals %#ic# fall elo% t#at /overty line6 %it# t#e goal of creating social value. 8#e creation of social value inclu!es /overty alleviation an! t#e roa!er i3/act of i3/roving liveli#oo! o//ortunities t#roug# t#e /rovision of ca/ital for 3icro enter/rise6 an! insurance an! savings for ris, 3itigation an! consu3/tion s3oot#ing. A large variety of actors /rovi!e 3icrofinance in In!ia6 using a range of 3icrofinance !elivery 3et#o!s. Since t#e I(I(I 'an, in In!ia6 various actors #ave en!eavore! to /rovi!e access to financial services to t#e /oor in creative %ays. 2overn3ents also #ave /ilote! national /rogra3s6 92:s #ave un!erta,en t#e activity of raising !onor fun!s for on1len!ing6 an! so3e an,s #ave /artnere! %it# /u lic organi*ations or 3a!e s3all inroa!s t#e3selves in /rovi!ing suc# services. 8#is #as resulte! in a rat#er roa! !efinition of 3icrofinance as any activity t#at targets /oor an! lo%1inco3e in!ivi!uals for t#e /rovision of financial services. 8#e range of activities un!erta,en in 3icrofinance inclu!e grou/ len!ing6 in!ivi!ual len!ing6 t#e /rovision of savings an! insurance6 ca/acity uil!ing6 an! agricultural usiness !evelo/3ent services. ;#atever t#e for3 of activity #o%ever6 t#e overarc#ing goal t#at unifies all actors in t#e /rovision of 3icrofinance is t#e creation of social value. 1.1 Microfinance -efinition Accor!ing to International La or :rgani*ation <IL:=6 >Microfinance is an economic development approach that involves providing financial services through institutions to low income clients?. In In!ia6 Microfinance #as een !efine! y >8#e 9ational Microfinance 8as,force6 1+++? 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?. @8#e /oor stay /oor6 not ecause t#ey are la*y ut ecause t#ey #ave no access to ca/ital.@ 8#e !ictionary 3eaning of AfinanceB is 3anage3ent of 3oney. 8#e 3anage3ent of 3oney !enotes acCuiring D using 3oney. Micro Einance is u**ing %or!6 use! %#en financing for
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3icro entre/reneurs. (once/t of 3icro finance is e3erge! in nee! of 3eeting s/ecial goal to e3/o%er un!er1/rivilege! class of society6 %o3en6 an! /oor6 !o%ntro!!en y natural reasons or 3en 3a!eF caste6 cree!6 religion or ot#er%ise. 8#e /rinci/les of Micro Einance are foun!e! on t#e /#iloso/#y of coo/eration an! its central values of eCuality6 eCuity an! 3utual self1#el/. At t#e #eart of t#ese /rinci/les are t#e conce/t of #u3an !evelo/3ent an! t#e rot#er#oo! of 3an e./resse! t#roug# /eo/le %or,ing toget#er to ac#ieve a etter life for t#e3selves an! t#eir c#il!ren. 8ra!itionally 3icro finance %as focuse! on /rovi!ing a very stan!ar!i*e! cre!it /ro!uct. 8#e /oor6 7ust li,e anyone else6 <in fact nee! li,e t#irst= nee! a !iverse range of financial instru3ents to e a le to uil! assets6 sta ili*e consu3/tion an! /rotect t#e3selves against ris,s. 8#us6 %e see a roa!ening of t#e conce/t of 3icro finance111 our current c#allenge is to fin! efficient an! relia le %ays of /rovi!ing a ric#er 3enu of 3icro finance /ro!ucts. Micro Einance is not 3erely e.ten!ing cre!it6 ut e.ten!ing cre!it to t#ose %#o reCuire 3ost for t#eir an! fa3ilyBs survival. It cannot e 3easure! in ter3 of Cuantity6 ut !ue %eig#tage to Cuality 3easure3ent. "o% cre!it availe! is use! to survive an! gro% %it# li3ite! 3eans.

%ho are the clients of (icro finance. 8#e ty/ical 3icro finance clients are lo%1inco3e /ersons t#at !o not #ave access to for3al financial institutions. Micro finance clients are ty/ically self1e3/loye!6 often #ouse#ol!1 ase! entre/reneurs. In rural areas6 t#ey are usually s3all far3ers an! ot#ers %#o are engage! in s3all inco3e1generating activities suc# as foo! /rocessing an! /etty tra!e. In ur an areas6 3icro finance activities are 3ore !iverse an! inclu!e s#o/,ee/ers6 service /rovi!ers6 artisans6 street ven!ors6 etc. Micro finance clients are /oor an! vulnera le non1/oor %#o #ave a relatively unsta le source of inco3e. Access to conventional for3al financial institutions6 for 3any reasons6 is inversely relate! to inco3e$ t#e /oorer you are6 t#e less li,ely t#at you #ave access. :n t#e ot#er #an!6 t#e c#ances are t#at6 t#e /oorer you are6 t#e 3ore e./ensive or onerous infor3al financial arrange3ents. Moreover6 infor3al arrange3ents 3ay not suita ly 3eet certain financial service nee!s or 3ay

e.clu!e you any%ay. In!ivi!uals in t#is e.clu!e! an! un!er1serve! 3ar,et seg3ent are t#e clients of 3icro finance. As %e roa!en t#e notion of t#e ty/es of services 3icro finance enco3/asses6 t#e /otential 3ar,et of 3icro finance clients also e./an!s. It !e/en!s on local con!itions an! /olitical cli3ate6 activeness of coo/eratives6 S"2 D 92:s an! su//ort 3ec#anis3. Eor instance6 3icro cre!it 3ig#t #ave a far 3ore li3ite! 3ar,et sco/e t#an say a 3ore !iversifie! range of financial services6 %#ic# inclu!es various ty/es of savings /ro!ucts6 /ay3ent an! re3ittance services6 an! various insurance /ro!ucts. Eor e.a3/le6 3any very /oor far3ers 3ay not really %is# to orro%6 ut rat#er6 %oul! li,e a safer /lace to save t#e /rocee!s fro3 t#eir #arvest as t#ese are consu3e! over several 3ont#s y t#e reCuire3ents of !aily living. (entral govern3ent in In!ia #as esta lis#e! a strong D e.tensive lin, et%een 9A'ARD <9ational 'an, for Agriculture D Rural Develo/3ent=6 State (oo/erative 'an,6 District (oo/erative 'an,s6 Pri3ary Agriculture D Mar,eting Societies at national6 state6 !istrict an! village level. The /eed in India

In!ia is sai! to e t#e #o3e of one t#ir! of t#e %orl!Bs /oorF official esti3ates range fro3 2& to 50 /ercent of t#e 3ore t#an one illion /o/ulation. A out )4 /ercent of t#e /oorest #ouse#ol!s !o not #ave access to cre!it. 8#e !e3an! for 3icrocre!it #as een esti3ate! at u/ to G30 illionF t#e su//ly is less t#an G2.2 illion co3 ine! y all involve! in t#e sector.

Due to t#e s#eer si*e of t#e /o/ulation living in /overty6 In!ia is strategically significant in t#e glo al efforts to alleviate /overty an! to ac#ieve t#e Millenniu3 Develo/3ent 2oal of #alving t#e %orl!Bs /overty y 2015. Microfinance #as een /resent in In!ia in one for3 or anot#er since t#e 1+40s an! is no% %i!ely acce/te! as an effective /overty alleviation strategy. :ver t#e last five years6 t#e 3icrofinance in!ustry #as ac#ieve! significant gro%t# in /art !ue to t#e /artici/ation of co33ercial an,s. Des/ite t#is gro%t#6 t#e /overty situation in In!ia continues to e c#allenging.

So3e /rinci/les t#at su33ari*e a century an! a #alf of !evelo/3ent /ractice %ere enca/sulate! in 2004 y (onsultative 2rou/ to Assist t#e Poor <(2AP= an! en!orse! y t#e 2rou/ of -ig#t lea!ers at t#e 2) Su33it on Hune 106 2004$ Poor /eo/le nee! not 7ust loans services. Microfinance 3ust e useful to /oor #ouse#ol!s$ #el/ing t#e3 raise inco3e6 uil! u/ assets an!Ior cus#ion t#e3selves against e.ternal s#oc,s. >Microfinance can /ay for itself.? Su si!ies fro3 !onors an! govern3ent are scarce an! uncertain6 an! so to reac# large nu3 ers of /oor /eo/le6 3icrofinance 3ust /ay for itself. Microfinance 3eans uil!ing /er3anent local institutions. Microfinance also 3eans integrating t#e financial nee!s of /oor /eo/le into a countryBs 3ainstrea3 financial syste3. >8#e 7o of govern3ent is to ena le financial services6 not to /rovi!e t#e3.? >Donor fun!s s#oul! co3/le3ent /rivate ca/ital6 not co3/ete %it# it.? >8#e ,ey ottlenec, is t#e s#ortage of strong institutions an! 3anagers.? Donors s#oul! focus on ca/acity uil!ing. Interest rate ceilings #urt /oor /eo/le y /reventing 3icrofinance institutions fro3 covering t#eir costs6 %#ic# c#o,es off t#e su//ly of cre!it. Microfinance institutions s#oul! 3easure an! !isclose t#eir /erfor3ance J financially an! socially. Microfinance can also e !istinguis#e! fro3 c#arity. It is etter to /rovi!e grants to fa3ilies %#o are !estitute6 or so /oor t#ey are unli,ely to e a le to generate t#e cas# flo% reCuire! to re/ay a loan. 8#is situation can occur for e.a3/le6 in a %ar *one or after a natural !isaster.
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ut also savings6 insurance an! 3oney transfer

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Financial needs and Financial ser0ices In !evelo/ing econo3ies an! /articularly in t#e rural areas6 3any activities t#at %oul! e classifie! in t#e !evelo/e! %orl! as financial are not 3oneti*e!$ t#at is6 3oney is not use! to carry t#e3 out. Al3ost y !efinition6 /oor /eo/le #ave very little 3oney. 'ut circu3stances often arise in t#eir lives in %#ic# t#ey nee! 3oney or t#e t#ings 3oney can uy. In Stuart Rut#erfor!Bs recent oo, The Poor and Their Money6 #e cites several ty/es of nee!s$

Lifecycle Needs$ suc# as %e!!ings6 funerals6 c#il! irt#6 e!ucation6 #o3e uil!ing6 %i!o%#oo!6 ol! age. Personal Emergencies$ suc# as sic,ness6 in7ury6 une3/loy3ent6 t#eft6 #arass3ent or !eat#.

Disasters$ suc# as fires6 floo!s6 cyclones an! 3an13a!e events li,e %ar or ull!o*ing of !%ellings.

nvestment !pportunities$ e./an!ing a usiness6 uying lan! or eCui/3ent6 i3/roving #ousing6 securing a 7o <%#ic# often reCuires /aying a large ri e=6 etc.

Poor /eo/le fin! creative an! often colla orative %ays to 3eet t#ese nee!s6 /ri3arily t#roug# creating an! e.c#anging !ifferent for3s of non1cas# value. (o33on su stitutes for cas# vary fro3 country to country ut ty/ically inclu!e livestoc,6 grains6 7e%ellery an! /recious 3etals. As Marguerite Ro inson !escri es in 8#e Microfinance Revolution6 t#e 1+)0s !e3onstrate! t#at >3icrofinance coul! /rovi!e large1scale outreac# /rofita ly6? an! in t#e 1++0s6 >3icrofinance egan to !evelo/ as an in!ustry?. In t#e 2000s6 t#e 3icrofinance in!ustryBs o 7ective is to satisfy t#e un3et !e3an! on a 3uc# larger scale6 an! to /lay a role in re!ucing /overty. ;#ile 3uc# /rogress #as een 3a!e in !evelo/ing a via le6 co33ercial 3icrofinance sector in t#e last fe%
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!eca!es6 several issues re3ain t#at nee! to e a!!resse! efore t#e in!ustry %ill e a le to satisfy 3assive %orl!%i!e !e3an!. 8#e o stacles or c#allenges to uil!ing a soun! co33ercial 3icrofinance in!ustry inclu!e$ K K K K K K Ina//ro/riate !onor su si!ies Poor regulation an! su/ervision of !e/osit1ta,ing MEIs Ee% MEIs t#at 3o ili*e savings Li3ite! 3anage3ent ca/acity in MEIs Institutional inefficiencies 9ee! for 3ore !isse3ination an! a!o/tion of rural6 agricultural 3icrofinance 3et#o!ologies #ole of Microfinance, 8#e 3icro cre!it of 3icrofinance /roga33e %as first initiate! in t#e year 1+4& in 'angla!es# %it# /ro3ise of /rovi!ing cre!it to t#e /oor %it#out collateral 6 alleviating /overty an! unleas#ing #u3an creativity an! en!eavor of t#e /oor /eo/le. Microfinance i3/act stu!ies #ave !e3onstrate! t#at L Microfinance #el/s /oor #ouse#ol!s 3eet asic nee!s an! /rotects t#e3 against ris,s. L 8#e use of financial services y lo%1inco3e #ouse#ol!s lea!s to i3/rove3ents in #ouse#ol! econo3ic %elfare an! enter/rise sta ility an! gro%t#. L 'y su//orting %o3ens econo3ic /artici/ation6 3icrofinance e3/o%ers %o3en6 t#ere y /ro3oting gen!er1eCuity an! i3/roving #ouse#ol! %ell eing. L 8#e level of i3/act relates to t#e lengt# of ti3e clients #ave #a! access to financial services. The 1ri'in of Microfinance
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Alt#oug# neit#er of t#e ter3s 3icrocre!it or 3icrofinance %ere use! in t#e aca!e3ic literature nor y !evelo/3ent ai! /ractitioners efore t#e 1+)0s or 1++0s6 res/ectively6 t#e conce/t of /rovi!ing financial services to lo% inco3e /eo/le is 3uc# ol!er. ;#ile t#e e3ergence of infor3al financial institutions in 9igeria !ates ac, to t#e 15 t# century6 t#ey %ere first esta lis#e! in -uro/e !uring t#e 1)t# century as a res/onse to t#e enor3ous increase in /overty since t#e en! of t#e e.ten!e! -uro/ean %ars <1&1) J 1&4)=. In 1420 t#e first loan fun! targeting /oor /eo/le %as foun!e! in Irelan! y t#e aut#or Honat#an S%ift. After a s/ecial la% %as /asse! in 1)236 %#ic# allo%e! c#arity institutions to eco3e for3al financial inter3e!iaries a loan fun! oar! %as esta lis#e! in 1)3& an! a ig oo3 %as initiate!. 8#eir outreac# /ea,e! 7ust efore t#e govern3ent intro!uce! a ca/ on interest rates in 1)43. At t#is ti3e6 t#ey /rovi!e! financial services to al3ost 20M of Iris# #ouse#ol!s. 8#e cre!it coo/eratives create! in 2er3any in 1)44 y Erie!ric# ;il#el3 Raiffeisen serve! 1.4 3illion /eo/le y 1+10. "e state! t#at t#e 3ain o 7ectives of t#ese coo/eratives >s#oul! e to control t#e use 3a!e of 3oney for econo3ic i3/rove3ents6 an! to i3/rove t#e 3oral an! /#ysical values of /eo/le an! also6 t#eir %ill to act y t#e3selves.? In t#e 1))0s t#e 'ritis# controlle! govern3ent of Ma!ras in Sout# In!ia6 trie! to use t#e 2er3an e./erience to a!!ress /overty %#ic# resulte! in 3ore t#an nine 3illion /oor In!ians elonging to cre!it coo/eratives y 1+4&. During t#is sa3e ti3e t#e Dutc# colonial a!3inistrators constructe! a coo/erative rural an,ing syste3 in In!onesia ase! on t#e Raiffeisen 3o!el %#ic# eventually eca3e 'an, Ra,yat In!onesia <'RI=6 no% ,no%n as t#e largest MEI in t#e %orl!. Microfinance Toda2 In t#e 1+40s a /ara!ig3 s#ift starte! to ta,e /lace. 8#e failure of su si!i*e! govern3ent or !onor !riven institutions to 3eet t#e !e3an! for financial services in !evelo/ing countries let to several ne% a//roac#es. So3e of t#e 3ost /ro3inent ones are /resente! elo%. 'an, Dagan 'ali <'D'= %as esta lis#e! in Se/te3 er 1+40 to serve lo% inco3e /eo/le in In!onesia %it#out any su si!ies an! is no% >%ell1,no%n as t#e earliest an, to institute co33ercial 3icrofinance?. ;#ile t#is is not true %it# regar! to t#e ac#ieve3ents 3a!e in -uro/e !uring t#e 1+t# century6 it still can e seen as a turning /oint %it# an ever increasing i3/act on t#e vie% of /oliticians an! !evelo/3ent ai! /ractitioners t#roug#out t#e %orl!. In 1+43 A((I:9 International6 a Nnite! States of A3erica <NSA= ase! non govern3ental organi*ation <92:= !is urse! its first loan in 'ra*il an! in 1+44 Professor Mu#a33a! Ounus
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starte! %#at later eca3e ,no%n as t#e 2ra3een 'an, y len!ing a total of G24 to 42 /eo/le in 'angla!es#. :ne year later t#e Self1-3/loye! ;o3enBs Association starte! to /rovi!e loans of a out G1.5 to /oor %o3en in In!ia. Alt#oug# t#e latter e.a3/les still %ere su si!i*e! /ro7ects6 t#ey use! a 3ore usiness oriente! a//roac# an! s#o%e! t#e %orl! t#at /oor /eo/le can e goo! cre!it ris,s %it# re/ay3ent rates e.cee!ing +5M6 even if t#e interest rate c#arge! is #ig#er t#an t#at of tra!itional an,s. Anot#er 3ilestone %as t#e transfor3ation of 'RI starting in 1+)4. :nce a loss 3a,ing institution c#anneling govern3ent su si!i*e! cre!its to in#a itants of rural In!onesia it is no% t#e largest MEI in t#e %orl!6 eing /rofita le even !uring t#e Asian financial crisis of 1++4 J 1++). In Ee ruary 1++4 3ore t#an 26+00 /olicy3a,ers6 3icrofinance /ractitioners an! re/resentatives of various e!ucational institutions an! !onor agencies fro3 134 !ifferent countries gat#ere! in ;as#ington D.(. for t#e first Micro (re!it Su33it. 8#is %as t#e start of a nine year long ca3/aign to reac# 100 3illion of t#e %orl! /oorest #ouse#ol!s %it# cre!it for self e3/loy3ent y 2005. Accor!ing to t#e Microcre!it Su33it (a3/aign Re/ort &46&0&60)0 clients #ave een reac#e! t#roug# 2524 MEIs y t#e en! of 20026 %it# 4165+4644) of t#e3 eing a3ongst t#e /oorest efore t#ey too, t#eir first loan. Since t#e ca3/aign starte! t#e average annual gro%t# rate in reac#ing clients #as een al3ost 40 /ercent. If it #as continue! at t#at s/ee! 3ore t#an 100 3illion /eo/le %ill #ave access to 3icrocre!it y no% an! y t#e en! of 2005 t#e goal of t#e 3icrocre!it su33it ca3/aign %oul! e reac#e!. As t#e /resi!ent of t#e ;orl! 'an, Ha3es ;olfenso#n #as /ointe! out6 /rovi!ing financial services to 100 3illion of t#e /oorest #ouse#ol!s 3eans #el/ing as 3any as 500 J &00 3illion /oor /eo/le.

1.2 Strate'ic )olic2 Initiati0es So3e of t#e 3ost recent strategic /olicy initiatives in t#e area of Microfinance ta,en y t#e govern3ent an! regulatory o!ies in In!ia are$ ;or,ing grou/ on cre!it to t#e /oor t#roug# S"2s6 92:s6 9A'ARD6 1++5 8#e 9ational Microfinance 8as,force6 1+++ ;or,ing 2rou/ on Einancial Elo%s to t#e Infor3al Sector <set u/ y PM:=6 2002
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Microfinance Develo/3ent an! -Cuity Eun!6 9A'ARD6 2005 ;or,ing grou/ on Einancing 9'E(s y 'an,s1 R'I

1.3 3cti0ities in Microfinance Microcredit, It is a s3all a3ount of 3oney loane! to a client y a an, or ot#er institution. Microcre!it can e offere!6 often %it#out collateral6 to an in!ivi!ual or t#roug# grou/ len!ing. Micro sa0in's, 8#ese are !e/osit services t#at allo% one to save s3all a3ounts of 3oney for future use. :ften %it#out 3ini3u3 alance reCuire3ents6 t#ese savings accounts allo% #ouse#ol!s to save in or!er to 3eet une./ecte! e./enses an! /lan for future e./enses. Micro insurance, It is a syste3 y %#ic# /eo/le6 usinesses an! ot#er organi*ations 3a,e a /ay3ent to s#are ris,. Access to insurance ena les entre/reneurs to concentrate 3ore on !evelo/ing t#eir usinesses %#ile 3itigating ot#er ris,s affecting /ro/erty6 #ealt# or t#e a ility to %or,. #e(ittances, 8#ese are transfer of fun!s fro3 /eo/le in one /lace to /eo/le in anot#er6 usually across or!ers to fa3ily an! frien!s. (o3/are! %it# ot#er sources of ca/ital t#at can fluctuate !e/en!ing on t#e /olitical or econo3ic cli3ate6 re3ittances are a relatively stea!y source of fun!s.

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1.! 4e'al #e'ulations 'an,s in In!ia are regulate! an! su/ervise! y t#e Reserve 'an, of In!ia <R'I= un!er t#e R'I Act of 1+346 'an,ing Regulation Act6 Regional Rural 'an,s Act6 an! t#e (oo/erative Societies Acts of t#e res/ective state govern3ents for coo/erative an,s. 9'E(s are registere! un!er t#e (o3/anies Act6 1+5& an! are governe! un!er t#e R'I Act. 8#ere is no s/ecific la% catering to 92:s alt#oug# t#ey can e registere! un!er t#e Societies Registration Act6 1)&06 t#e In!ian 8rust Act6 1))26 or t#e relevant state acts. 8#ere #as een a strong reliance on self1regulation for 92: MEIs an! as t#is a//lies to 92: MEIs 3o ili*ing !e/osits fro3 clients %#o also orro%. 8#is ten!ency is a concern !ue to enforce3ent /ro le3s t#at ten! to arise %it# self1regulatory organi*ations. In Hanuary 20006 t#e R'I essentially create! a ne% legal for3 for /rovi!ing 3icrofinance services for 9'E(s registere! un!er t#e (o3/anies Act so t#at t#ey are not su 7ect to any ca/ital or liCui!ity reCuire3ents if t#ey !o not go into t#e !e/osit ta,ing usiness. A sence of liCui!ity reCuire3ents is concern to t#e safety of t#e sector.

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Chapter 2, Microfinance in India At /resent len!ing to t#e econo3ically active /oor ot# rural an! ur an is /egge! at aroun! Rs 4000 crores in t#e In!ian an,sB cre!it outstan!ing. As against t#is6 accor!ing to even t#e 3ost conservative esti3ates6 t#e total !e3an! for cre!it reCuire3ents for t#is /art of In!ian society is so3e%#ere aroun! Rs 26006000 crores. Microfinance chan'in' the face of poor India Micro1Einance is e3erging as a /o%erful instru3ent for /overty alleviation in t#e ne% econo3y. In In!ia6 3icro1Einance scene is !o3inate! y Self "el/ 2rou/s <S"2s= 1 'an,s lin,age Progra33e6 ai3e! at /rovi!ing a cost effective 3ec#anis3 for /rovi!ing financial services to t#e Punreac#e! /oorP. In t#e In!ian conte.t ter3s li,e @s3all an! 3arginal far3ers@6 @ rural artisans@ an! @econo3ically %ea,er sections@ #ave een use! to roa!ly !efine 3icro1finance custo3ers. Researc# across t#e glo e #as s#o%n t#at6 over ti3e6 3icrofinance clients increase t#eir inco3e an! assets6 increase t#e nu3 er of years of sc#ooling t#eir c#il!ren receive6 an! i3/rove t#e #ealt# an! nutrition of t#eir fa3ilies. A 3ore refine! 3o!el of 3icro1cre!it !elivery #as evolve! lately6 %#ic# e3/#asi*es t#e co3 ine! !elivery of financial services along %it# tec#nical assistance6 an! agricultural usiness !evelo/3ent services. ;#en co3/are! to t#e %i!er S"2 an, lin,age 3ove3ent in In!ia6 /rivate MEIs #ave #a! li3ite! outreac#. "o%ever6 %e #ave seen a recent tren! of larger 3icrofinance institutions transfor3ing into 9on1'an, Einancial Institutions <9'E(s=. 8#is c#anging face of 3icrofinance in In!ia a//ears to e /ositive in ter3s of t#e a ility of 3icrofinance to attract 3ore fun!s an! t#erefore increase outreac#. In ter3s of !e3an! for 3icro1cre!it or 3icro1finance6 t#ere are t#ree seg3ents6 %#ic# !e3an! fun!s. 8#ey are$

15

At t#e very otto3 in ter3s of inco3e an! assets6 are t#ose %#o are landless and en'a'ed in a'ricultural 5or& on a seasonal basis$ and (anual labourers in forestr2$ (inin'$ household industries$ construction and transport. 8#is seg3ent reCuires6 first an! fore3ost6 consu3/tion cre!it !uring t#ose 3ont#s %#en t#ey !o not get la our %or,6 an! for contingencies suc# as illness. 8#ey also nee! cre!it for acCuiring s3all /ro!uctive assets6 suc# as livestoc,6 using %#ic# t#ey can generate a!!itional inco3e.

8#e ne.t 3ar,et seg3ent is s(all and (ar'inal far(ers and rural artisans$ 5ea0ers and those self-e(plo2ed in the urban infor(al sector as ha5&ers$ 0endors$ and 5or&ers in household (icro-enterprises. 8#is seg3ent 3ainly nee!s cre!it for %or,ing ca/ital6 a s3all /art of %#ic# also serves consu3/tion nee!s. 8#is seg3ent also nee!s ter3 cre!it for acCuiring a!!itional /ro!uctive assets6 suc# as irrigation /u3/sets6 ore%ells an! livestoc, in case of far3ers6 an! eCui/3ent <loo3s6 3ac#inery= an! %or,s#e!s in case of non1far3 %or,ers.

8#e t#ir! 3ar,et seg3ent is of s(all and (ediu( far(ers 5ho ha0e 'one in for co((ercial crops suc# as sur/lus /a!!y an! %#eat6 cotton6 groun!nut6 an! ot#ers engage! in !airying6 /oultry6 fis#ery6 etc. A3ong non1far3 activities6 t#is seg3ent inclu!es t#ose in villages an! slu3s6 engage! in /rocessing or 3anufacturing activity6 running /rovision stores6 re/air %or,s#o/s6 tea s#o/s6 an! various service enter/rises. 8#ese /ersons are not al%ays /oor6 t#oug# t#ey live arely a ove t#e /overty line an! also suffer fro3 ina!eCuate access to for3al cre!it.

;ell t#ese are t#e /eo/le %#o reCuire 3oney an! %it# Microfinance it is /ossi le. Rig#t no% t#e /ro le3 is t#at6 it is S"2sP %#ic# are !oing t#is an! efforts s#oul! e 3a!e so t#at t#e ig financial institutions also turn u/ an! start su//lying fun!s to t#ese /eo/le. 8#is %ill lea! to a etter In!ia an! %ill !efinitely fulfill t#e !rea3 of our late )ri(e Minister$ Mrs. Indira andhi$ i.e. )o0ert2. :ne of t#e state3ent is really a//ro/riate #ere6 %#ic# is as$ 6Mone2$ sa2s the pro0erb (a&es (one2. %hen 2ou ha0e 'ot a little$ it is often eas2 to 'et (ore. The 'reat difficult2 is to 'et that little.7Adams Smith.
16

8o!ay In!ia is facing 3a7or /ro le3 in re!ucing /overty. A out 25 3illion /eo/le in In!ia are un!er elo% /overty line. ;it# lo% /er ca/ita inco3e6 #eavy /o/ulation /ressure6 /revalence of 3assive une3/loy3ent an! un!ere3/loy3ent 6 lo% rate of ca/ital for3ation 6 3is!istri ution of %ealt# an! assets 6 /revalence of lo% tec#nology an! /oor econo3ics organi*ation an! insta ility of out/ut of agriculture /ro!uction an! relate! sectors #ave 3a!e In!ia one of t#e /oor countries of t#e %orl!. )resent Scenario of India, In!ia falls un!er lo% inco3e class accor!ing to ;orl! 'an,. It is secon! /o/ulate! country in t#e %orl! an! aroun! 40 M of its /o/ulation lives in rural area. &0M of /eo/le !e/en! on agriculture6 as a result t#ere is c#ronic un!ere3/loy3ent an! /er ca/ita inco3e is only G 32&2. 8#is is not enoug# to /rovi!e foo! to 3ore t#an one in!ivi!ual . 8#e o vious result is a 7ect /overty 6 lo% rate of e!ucation6 lo% se. ratio6 e./loitation. 8#e 3a7or factor account for #ig# inci!ence of rural /overty is t#e lo% asset ase. Accor!ing to Reserve 'an, of In!ia6 a out 51 M of /eo/le #ouse /ossess only 10M of t#e total asset of In!ia .8#is #as resulte! lo% /ro!uction ca/acity ot# in agriculture <%#ic# contri ute aroun! 22125M of 2DP = an! Manufacturing sector. Rural /eo/le #ave very lo% access to institutionali*e! cre!it< fro3 co33ercial an,=. )o0ert2 alle0iation pro'ra((es and concepualisation of Microfinance, 8#ere #as een continuous efforts of /lanners of In!ia in a!!ressing t#e /overty . 8#ey "ave co3e u/ %it# !evelo/3ent /rogra33es li,e Integrate! Rural Develo/3ent /roga33e <IRDP=6 9ational Rural -3/loy3ent Progra33e <9R-P= 6 Rural La our -3/loy3ent 2uarantee Progra33e <RL-2P= etc. 'ut t#ese /roga33e #ave not een a le to create 3assive i3/act in /overty alleviation. 8#e /ro!uction oriente! a//roac# of /lanning %it#out altering t#e 3o!e of /ro!uction coul! not ut result of t#e gains of !evelo/3ent y o%ners of instru3ent of /ro!uction. 8#e 3o!e of /ro!uction !oes re3ain sa3e as t#e o%ner of t#e instru3ent #ave lo% access to cre!it %#ic# is t#e 3a7or factor of /ro!uction. 8#us in 9ineties 9ational an, for agriculture an! rural !evelo/3ent<9A'ARD= launc#es /ilot /ro7ects of Microfinance to ri!ge t#e ga/ et%een !e3an! an! su//ly of fun!s in t#e lo%er rungs of rural econo3y. Microfinance . t#e u**ing %or! of t#is !eca!e %as 3eant to cure t#e illness of rural econo3y.
17

;it# t#is conce/t of Self Reliance6 Self Sufficiency an! Self "el/ gaine! 3o3entu3. 8#e In!ian 3icrofinance is !o3inate! y Self "el/ 2rou/s <S"2s= an! t#eir lin,age to 'an,s. De/rive! of t#e asic an,ing facilities6 t#e rural an! se3i ur an In!ian 3asses are still relying on infor3al financing inter3e!iaries li,e 3oney len!ers6 fa3ily 3e3 ers6 frien!s etc. 2.1 -istribution of Indebted #ural Households, 3'enc2 5ise Credit 3'enc2 o0ern(ent Cooperati0e Societies Co((ercial ban&s and ##8s Insurance )ro0ident Fund 1ther Institutional Sources 3ll Institutional 3'encies 4andlord 3'ricultural Mone2lenders )rofessional Mone2lenders #elati0es and Friends 1thers 3ll /on Institutional 3'encies 3ll 3'encies Source, -ebt and In0est(ent Sur0e2$ )ercenta'e of #ural Households 6.1 21.6 33.* 9.3 9.* 1.6 6!.9 !.9 *.9 19." "." :.9 36.9 199.9 oI 1::2

Seeing t#e figures fro3 t#e a ove ta le6 it is evi!ent t#at t#e s#are of institutional cre!it is 3uc# 3ore no%. 8#e a ove survey result s#o%s t#at till 1++16 institutional cre!it accounte! for aroun! t%o1t#ir!s of t#e cre!it reCuire3ent of rural #ouse#ol!s. 8#is s#o%s a co3/aratively etter /enetration of t#e an,ing an! financial institutions in rural In!ia. )ercenta'e distribution of debt a(on' indebted #ural 4abor Households b2 source of debt Sr. /o. Source of debt Households ;it# cultivate! lan!
18

;it#out cultivate! lan!

All

1 2 3 ! " 6 * +

2overn3ent (o1o/erative Societies 'an,s -3/loyers Money len!ers S#o/1,ee/ers RelativesIErien!s :t#er Sources 8otal #ound of /.S.S.= 1:::-2999

4.++ 1&.4) 1+.+1 5.35 2).12 &.4& 14.5) 3.51 100.00

5.4& +.4& 14.55 ).33 35.23 4.44 15.&) 3.52 100.00

5.34 13.0+ 14.1+ &.)& 31.40 4.13 15.14 3.52 100.00

Source, #ural labor en;uir2 report on indebtedness a(on' rural labor households <"" th

8#e ta le a ove reveals t#at 3ost of t#e rural la our #ouse#ol!s /refer to raise loan fro3 t#e non1institutional sources. A out &4M of t#e total !e t reCuire3ent of t#ese #ouse#ol!s %as 3et y t#e non1institutional sources !uring 1+++12000. Money len!ers alone /rovi!e! !e t <Rs.1+1)= to t#e tune of 32M of t#e total !e t of t#ese #ouse#ol!s as against 2)M !uring 1++31 +4. Relatives an! frien!s an! s#o/,ee/ers #ave een t%o ot#er sources %#ic# toget#er accounte! for a out 22M of t#e total !e t at all1In!ia level. 8#e institutional sources coul! 3eet only 3&M of t#e total cre!it reCuire3ent of t#e rural la our #ouse#ol!s !uring 1+++12000 %it# only one /ercent increase over t#e /revious survey in 1++31+4. A3ong t#e institutional sources of !e t6 t#e an,s continue! to e t#e single largest source of !e t 3eeting a out 14 /ercent of t#e total !e t reCuire3ent of t#ese #ouse#ol!s. In co3/arison to t#e /revious enCuiry6 t#e !e/en!ence on co1o/erative societies #as increase! consi!era ly in 1+++12000. During 1+++12000 as 3uc# as 13M of t#e !e t %as raise! fro3 t#is source as against )M in 1++31+4. "o%ever6 in t#e case of t#e an,s an! t#e govern3ent agencies it !ecrease! 3arginally fro3 1).))M an! ).24M to 14.1+M an! 5.34M res/ectively !uring 1+++12000 survey. 2.2 #elati0e share of 8orro5in' of Culti0ator Households <in /er cent= Sources of Credit /on Institutional Of which: Mone2lenders Institutional Of which: 1:"1 +2.4 &+.4 4.3 1:61 )1.3 4+.2 1).4
19

1:*1 &).3 3&.1 31.4

1:+1 3&.) 1&.1 &3.2

1::1 30.& 14.5 &&.3

2992> 3).+ 2&.) &1.1

Cooperati0e Societies$etc Co((ercial ban&s ?nspecified Total

3.3 0.+ 1 100.0

2.& 0.& 1 100.0

22.0 2.4 1 100.0

2+.) 2).) 1 100.0

30.0 35.2 3.1 100.0

30.2 2&.3 1 100.0

> 3ll India -ebt and In0est(ent Sur0e2$ /SS1$ ":th round$ 2993 Source, 3ll India -ebt and In0est(ent Sur0e2s 8a le s#o%s t#e increasing influence of 3oneylen!ers in t#e last !eca!e. 8#e s#are of 3oneylen!ers in t#e total non institutional cre!it %as !eclining till 1+)16 starte! /ic,ing u/ fro3 t#e 1++0s an! reac#e! 24 /er cent in 2001. At t#e sa3e ti3e t#e s#are of co33ercial an,s in institutional cre!it #as co3e !o%n y al3ost t#e sa3e /ercentage /oints !uring t#is /erio!. 8#oug#6 t#e s#are of coo/erative societies is increasing continuously6 t#e gro%t# #as flattene! !uring t#e last t#ree !eca!es.

2.3 -istribution based on 3sset si@e of #ural Households <in /er cent= Household 3ssets <#s A999= 4ess than " "-19 19-29 29-39 39-"9 "9-*9 *9-199 199-1"9 1"9-2"9 2"9 and abo0e 3ll classes Institutional 3'enc2 42 44 44 &) 55 53 &1 &1 &) )1 && oI$ 1::2
20

/on-Institutional 3'enc2 5) 53 5& 32 45 44 3+ 3+ 32 1+ 34

3ll 100 100 100 100 100 100 100 100 100 100 100

Source, -ebt and In0est(ent Sur0e2$

8#e #ouse#ol!s %it# a lo%er asset si*e %ere una le to fin! financing o/tions fro3 for3al cre!it !is urse3ent sources. 8#is %as !ue to t#e reCuire3ent of /#ysical collateral y an,ing an! financial institutions for !is ursing cre!it. Eor #ouse#ol!s %it# less t#an Rs 206000 %ort# of /#ysical assets6 t#e 3ost convenient source of cre!it %as non institutional agencies li,e lan!lor!s6 3oneylen!ers6 relatives6 frien!s6 etc. Loo,ing at t#e fin!ings of t#e stu!y co33issione! y Asia tec#nical De/art3ent of t#e ;orl! 'an, <1++5=6 t#e /ur/ose or t#e reason e#in! ta,ing cre!it y t#e rural /oor %as consu3/tion cre!it6 savings6 /ro!uction cre!it an! insurance. (onsu3/tion cre!it constitute! t%o1t#ir!s of t#e cre!it usage %it#in %#ic# al3ost t#ree1fourt#s of t#e !e3an! %as for s#ort /erio!s to 3eeting e3ergent nee!s suc# as illness an! #ouse#ol! e./enses !uring t#e lean season. Al3ost entire !e3an! for t#e consu3/tion cre!it %as 3et y infor3al sources at #ig# to e./loitive interest rates t#at varie! fro3 30 to +0 /er cent /er annu3. Al3ost 45 /er cent of t#e /ro!uction cre!it <%#ic# accounte! for a out one1t#ir! of t#e total cre!it availe! of coo/eratives. 2.! 8an&in' BCpansion Starting in t#e late 1+&0s6 In!ia %as t#e #o3e to one of t#e largest state interventions in t#e rural cre!it 3ar,et. 8#is /#ase is ,no%n as t#e >Social 'an,ing? /#ase. It %itnesse! t#e nationali*ation of e.isting /rivate co33ercial an,s6 3assive e./ansion of ranc# net%or, in rural areas6 3an!atory !irecte! cre!it to /riority sectors of t#e econo3y6 su si!i*e! rates of interest an! creation of a ne% set of regional rural an,s <RR's= at t#e !istrict level an! a s/eciali*e! a/e. an, for agriculture an! rural !evelo/3ent <9A'ARD= at t#e national level. 8#e 9et State Do3estic Pro!uct <9SDP= is a 3easure of t#e econo3ic activity in t#e state an! co3/aring it %it# t#e utili*ation of an, cre!it or an, !e/osits in!icates #o% 3uc# econo3ic y t#e rural 3asses= %as 3et y t#e for3al sector6 3ainly an,s an!

21

activity is eing finance! y t#e an,s an! %#et#er t#ere e.ists unta//e! /otential for increasing !e/osits in t#at state.

E.g. In the year 2003-2004 the percentage of ban deposits to !S"# is pretty high at aro$nd %&'-(0' in )ihar and *har hand or these states are not as $nder ban ed as tho$ght to be. 2." Microfinance Social 3spects Micro financing institutions significantly contri ute! to gen!er eCuality an! %o3enBs e3/o%er3ent as %ell as /oor !evelo/3ent an! civil society strengt#ening. (ontri ution to %o3enBs a ility to earn an inco3e le! to t#eir econo3ic e3/o%er3ent6 increase! %ell eing of %o3en an! t#eir fa3ilies an! %i!er social an! /olitical e3/o%er3ent. Microfinance /rogra3s targeting %o3en eca3e a 3a7or /lan, of /overty alleviation an! gen!er strategies in t#e 1++0s. Increasing evi!ence of t#e centrality of gen!er eCuality to /overty re!uction an! %o3enBs #ig#er cre!it re/ay3ent rates le! to a general consensus on t#e !esira ility of targeting %o3en. Chapter 3, Self Help roups <SH s=

Self1 #el/ grou/s <S"2s= /lay to!ay a 3a7or role in /overty alleviation in rural In!ia. A gro%ing nu3 er of /oor /eo/le <3ostly %o3en= in various /arts of In!ia are 3e3 ers of S"2s an! actively engage in savings an! cre!it <SI(=6 as %ell as in ot#er activities <inco3e generation6 natural resources 3anage3ent6 literacy6 c#il! care an! nutrition6 etc.=. 8#e SI( focus in t#e S"2 is t#e 3ost /ro3inent ele3ent an! offers a c#ance to create so3e control over ca/ital6 al eit in very s3all a3ounts. 8#e S"2 syste3 #as /roven to e very relevant an! effective in offering %o3en t#e /ossi ility to rea, gra!ually a%ay fro3 e./loitation an! isolation. 3.1 Ho5 self-help 'roups 5or&

22

9A'ARD <1++4= !efines S"2s as @s3all6 econo3ically #o3ogenous affinity grou/s of rural /oor6 voluntarily for3e! to save an! 3utually contri ute to a co33on fun! to e lent to its 3e3 ers as /er t#e grou/ 3e3 ersP !ecision@. Most S"2s in In!ia #ave 10 to 25 3e3 ers6 %#o can e eit#er only 3en6 or only %o3en6 or only yout#6 or a 3i. of t#ese. As %o3enPs S"2s or sang#a #ave een /ro3ote! y a %i!e range of govern3ent an! non1 govern3ental agencies6 t#ey no% 3a,e u/ +0M of all S"2s. 8#e rules an! regulations of S"2s vary accor!ing to t#e /references of t#e 3e3 ers an! t#ose facilitating t#eir for3ation. A co33on c#aracteristic of t#e grou/s is t#at t#ey 3eet regularly <ty/ically once /er %ee, or once /er fortnig#t= to collect t#e savings fro3 3e3 ers6 !eci!e to %#ic# 3e3 er to give a loan6 !iscuss 7oint activities <suc# as training6 running of a co33unal usiness6 etc.=6 an! to 3itigate any conflicts t#at 3ig#t arise. Most S"2s #ave an electe! c#air/erson6 a !e/uty6 a treasurer6 an! so3eti3es ot#er office #ol!ers. Most S"2s start %it#out any e.ternal financial ca/ital y saving regular contri utions y t#e 3e3 ers. 8#ese contri utions can e very s3all <e.g. 10 Rs /er %ee,=. After a /erio! of consistent savings <e.g. & 3ont#s to one year= t#e S"2s start to give loans fro3 savings in t#e for3 of s3all internal loans for 3icro enter/rise activities an! consu3/tion. :nly t#ose S"2s t#at #ave utili*e! t#eir o%n fun!s %ell are assiste! %it# e.ternal fun!s t#roug# lin,ages %it# an,s an! ot#er financial inter3e!iaries. "o%ever6 it is generally acce/te! t#at S"2s often !o not inclu!e t#e /oorest of t#e /oor6 for reasons suc# as$ <a= Social factors <t#e /oorest are often t#ose %#o are socially 3arginali*e! ecause of caste affiliation an! t#ose %#o are 3ost s,e/tical of t#e /otential enefits of collective action=. <b= Bcono(ic factors <t#e /oorest often !o not #ave t#e financial resources to contri ute to t#e savings an! /ay 3e3 ers#i/ feesF t#ey are often t#e ones %#o 3igrate !uring t#e lean season6 t#us 3a,ing grou/ 3e3 ers#i/ !ifficult=. <c= Intrinsic biases of the i(ple(entin' or'ani@ations <as t#e /oorest of t#e /oor are t#e 3ost !ifficult to reac# an! 3otivate6 i3/le3enting agencies ten! to leave t#e3 out6 /referring to focus on t#e ne.t %ealt# category=.
23

3.2 Sources of capital and lin&s bet5een SH s and 8an&s S"2s can only fulfill a role in t#e rural econo3y if grou/ 3e3 ers #ave access to financial ca/ital an! 3ar,ets for t#eir /ro!ucts an! services. ;#ile t#e grou/s initially generate t#eir o%n savings t#roug# t#rift <%#ere y t#rift i3/lies savings create! y /ost/oning al3ost necessary consu3/tion6 %#ile savings i3/ly t#e e.istence of sur/lus %ealt#=6 t#eir ai3 is often to lin, u/ %it# financial institutions in or!er to o tain furt#er loans for invest3ents in rural enter/rises. 92:s an! an,s are giving loans to S"2s eit#er as @3atc#ing loans@ <%#ereas t#e loan a3ount is /ro/ortionate to t#e grou/Ps savings= or as fi.e! a3ounts6 !e/en!ing on t#e grou/Ps recor! of re/ay3ent6 reco33en!ations y grou/ facilitators6 collaterals /rovi!e!6 etc. 3.3 Ho5 SH s sa0e Self1#el/ grou/s 3o ili*e savings fro3 t#eir 3e3 ers6 an! 3ay t#en on1len! t#ese fun!s to one anot#er6 usually at a//arently #ig# rates of interest %#ic# reflect t#e 3e3 ersB un!erstan!ing of t#e #ig# returns t#ey can earn on t#e s3all su3s investe! in t#eir 3icro1enter/rises6 an! t#e even #ig#er cost of fun!s fro3 3oney len!ers. If t#ey !o not %is# to use t#e 3oney6 t#ey 3ay !e/osit it in a an,. If t#e 3e3 ersB nee! for fun!s e.cee!s t#e grou/Bs accu3ulate! savings6 t#ey 3ay orro% fro3 a an, or ot#er organi*ation6 suc# as a 3icro1finance non1govern3ent organi*ation6 to aug3ent t#eir o%n fun!. 8#e syste3 is very fle.i le. 8#e grou/ aggregates t#e s3all in!ivi!ual saving an! orro%ing reCuire3ents of its 3e3 ers6 an! t#e an, nee!s only to 3aintain one account for t#e grou/ as a single entity. 8#e an,er 3ust assess t#e co3/etence an! integrity of t#e grou/ as a 3icro1 an,6 ut once #e #as !one t#is #e nee! not concern #i3self %it# t#e in!ivi!ual loans 3a!e y t#e grou/ to its 3e3 ers6 or t#e uses to %#ic# t#ese loans are /ut. "e can treat t#e grou/ as a single custo3er6 %#ose total usiness an! transactions are /ro a ly si3ilar in a3ount to t#e average for #is nor3al custo3ers6 ecause t#ey re/resent t#e co3 ine! an,ing usiness of so3e t%enty A3icro1custo3ersB. Any an, ranc# can #ave a s3all or a large nu3 er of suc# accounts6 %it#out #aving to c#ange its 3et#o!s of o/eration. Nnli,e 3any custo3ers6 !e3an! fro3 S"2s is not /rice1sensitive. Illiterate village %o3en are so3eti3es etter an,ers t#an so3e %it# 3ore /rofessional Cualifications. 8#ey ,no% t#at ra/i! access to fun!s is 3ore i3/ortant t#an t#eir cost6 an! t#ey also ,no%6 even t#oug# t#ey 3ig#t
24

not e a le to calculate t#e figures6 t#at t#e ty/ical 3icro1enter/rise earns %ell over 500M return on t#e s3all su3 investe! in it <"ar/er6 M6 1++46 /. 15=. 8#e grou/s t#us c#arge t#e3selves #ig# rates of interestF t#ey are #a//y to ta,e a!vantage of t#e generous s/rea! t#at t#e 9A'ARD su si!i*e! an, len!ing rate of 12M allo%s t#e36 ut t#ey are also %illing to orro% fro3 92:IMEIs %#ic# on1len! fun!s fro3 SID'I at 15M6 or fro3 Ane% generationB institutions suc# as 'asi. Einance at 1).5M or 21M. 3.! SH s-8an& 4in&a'e Model 9A'ARD is /resently o/erating t#ree 3o!els of lin,age of an,s %it# S"2s an! 92:s$ Model D 1, In t#is 3o!el6 t#e an, itself acts as a Self "el/ 2rou/ Pro3oting Institution <S"PI=. It ta,es initiatives in for3ing t#e grou/s6 nurtures t#e3 over a /erio! of ti3e an! t#en /rovi!es cre!it to t#e3 after satisfying itself a out t#eir 3aturity to a sor cre!it. A out 1&M of S"2s an! 13M of loan a3ounts are using t#is 3o!el <as of Marc# 2002=. Model D 2, In t#is 3o!el6 grou/s are for3e! y 92:s <in 3ost of t#e cases= or y govern3ent agencies. 8#e grou/s are nurture! an! traine! y t#ese agencies. 8#e an, t#en /rovi!es cre!it !irectly to t#e S"2s6 after o serving t#eir o/erations an! 3aturity to a sor cre!it. ;#ile t#e an, /rovi!es loans to t#e grou/s !irectly6 t#e facilitating agencies continue t#eir interactions %it# t#e S"2s. Most lin,age e./eriences egin %it# t#is 3o!el %it# 92:s /laying a 3a7or role. 8#is 3o!el #as also using t#is 3o!el. Model D 3, Due to various reasons6 an,s in so3e areas are not in a /osition to even finance S"2s /ro3ote! an! nurture! y ot#er agencies. In suc# cases6 t#e 92:s act as ot# facilitators an! 3icro1 finance inter3e!iaries. Eirst6 t#ey /ro3ote t#e grou/s6 nurture an! train t#e3 an! t#en a//roac# an,s for ul, loans for on1len!ing to t#e S"2s. A out +M of S"2s an! 13M of loan a3ounts are using t#is 3o!el. een /o/ular an! 3ore acce/ta le to an,s6 as so3e of t#e !ifficult functions of social !yna3ics are e.ternali*e!. A out 45M of S"2s an! 4)M of loan a3ounts are

25

Co(parati0e 3nal2sis of Micro-finance Ser0ices offered to the poor

Source$ R. Arunac#ala3 1 Alternative 8ec#nologies in t#e In!ian Micro1 finance In!ustry 3." 4ife insurances for self-help 'roup (e(bers 8#e Nnite! In!ia Insurance (o3/any #as !esigne! t%o PLLIs </ersonal line life insurances= for %o3en in rural areas. 8#e co3/any %ill e targeting self1#el/ grou/s6 of %#ic# t#ere are aroun! 2006000 in t#e country6 %it# 15120 %o3en in a grou/. 8#e t%o /olicies are

26

<1= t#e Mot#er 8eresa ;o3en D (#il!ren Policy6 %it# t#e ai3 of giving to t#e %o3an in t#e event of acci!ental !eat# of #er #us an! an! to su//ort #er 3inor c#il!ren in t#e event of #er !eat#6 an! <2= 8#e Nni3icro "ealt# Sc#e3e6 giving /ersonal acci!ent an! #os/itali*ation covers esi!es cover for !a3age to !%elling !ue to fire an! allie! /erils. Chapter !, Micro Finance Models 1. Micro Finance Institutions <MFIs=, MEIs are an e.tre3ely #eterogeneous grou/ co3/rising 9'E(s6 societies6 trusts an! coo/eratives. 8#ey are /rovi!e! financial su//ort fro3 e.ternal !onors an! a/e. institutions inclu!ing t#e Ras#triya Ma#ila 5os# <RM5=6 SID'I Eoun!ation for 3icro1cre!it an! 9A'ARD an! e3/loy a variety of %ays for cre!it !elivery. Since 20006 co33ercial an,s inclu!ing Regional Rural 'an,s #ave een /rovi!ing fun!s to MEIs for on len!ing to /oor clients. 8#oug# initially6 only a #an!ful of 92:s %ere >into? financial inter3e!iation using a variety of !elivery 3et#o!s6 t#eir nu3 ers #ave increase! consi!era ly to!ay. ;#ile t#ere is no /u lis#e! !ata on /rivate MEIs o/erating in t#e country6 t#e nu3 er of MEIs is esti3ate! to e aroun! )00. 4e'al For(s of MFIs in India T2pes of MFIs 1. /ot for )rofit MFIs a.= 92: 1 MEIs .= 9on1/rofit (o3/anies 2. Mutual 8enefit a.= Mutually Ai!e! (oo/erative Societies <MA(S= an! si3ilarly set u/ institutions
27

Bsti(ated 4e'al 3cts under 5hich #e'istered /u(ber> 400 to 500 Societies Registration Act6 1)&0 or si3ilar 10 Provincial Acts In!ian 8rust Act6 1))2 Section 25 of t#e (o3/anies Act6 1+5& Act enacte! y State 2overn3ent MFIs 200 to 250 Mutually Ai!e! (oo/erative Societies

3. For )rofit MFIs a.= 8otal 9on1'an,ing Einancial

&

In!ian (o3/anies Act6 1+5& Reserve 'an, of In!ia Act6 1+34

(o3/anies <9'E(s= 400 1 )00

Source$ 9A'ARD %e site

2. 8an& )artnership Model 8#is 3o!el is an innovative %ay of financing MEIs. 8#e an, is t#e len!er an! t#e MEI acts as an agent for #an!ling ite3s of %or, relating to cre!it 3onitoring6 su/ervision an! recovery. In ot#er %or!s6 t#e MEI acts as an agent an! ta,es care of all relations#i/s %it# t#e client6 fro3 first contact to final re/ay3ent. 8#e 3o!el #as t#e /otential to significantly increase t#e a3ount of fun!ing t#at MEIs can leverage on a relatively s3all eCuity ase. A su 1 variation of t#is 3o!el is %#ere t#e MEI6 as an 9'E(6 #ol!s t#e in!ivi!ual loans on its oo,s for a %#ile efore securiti*ing t#e3 an! selling t#e3 to t#e an,. Suc# refinancing t#roug# securiti*ation ena les t#e MEI enlarge! fun!ing access. If t#e MEI fulfils t#e >true sale? criteria6 t#e e./osure of t#e an, is treate! as eing to t#e in!ivi!ual orro%er an! t#e /ru!ential e./osure nor3s !o not t#en in#i it suc# fun!ing of MEIs y co33ercial an,s t#roug# t#e securiti*ation structure.

3. 8an&in' Correspondents 8#e /ro/osal of > an,ing corres/on!ents? coul! ta,e t#is 3o!el a ste/ furt#er e.ten!ing it to savings. It %oul! allo% MEIs to collect savings !e/osits fro3 t#e /oor on e#alf of t#e an,. It %oul! use t#e a ility of t#e MEI to get close to /oor clients %#ile relying on t#e financial strengt# of t#e an, to safeguar! t#e !e/osits. 8#is regulation evolve! at a ti3e %#en t#ere %ere genuine fears t#at fly1 y1nig#t agents /ur/orting to act on e#alf of an,s in %#ic# t#e /eo/le #ave confi!ence coul! 3o ili*e savings of gulli le /u lic an! t#en vanis# %it# t#e3. It re3ains
28

to

e seen %#et#er t#e 3ec#anics of suc# relations#i/s can

e %or,e! out in a %ay t#at

3ini3i*es t#e ris, of 3isuse.

!. Ser0ice Co(pan2 Model Nn!er t#is 3o!el6 t#e an, for3s its o%n MEI6 /er#a/s as an 9'E(6 an! t#en %or,s #an! in #an! %it# t#at MEI to e.ten! loans an! ot#er services. :n /a/er6 t#e 3o!el is si3ilar to t#e /artners#i/ 3o!el$ t#e MEI originates t#e loans an! t#e an, oo,s t#e3. 'ut in fact6 t#is 3o!el #as t%o very !ifferent an! interesting o/erational features$ <a= 8#e MEI uses t#e ranc# net%or, of t#e an, as its outlets to reac# clients. 8#is allo%s t#e client to e reac#e! at lo%er cost t#an in t#e case of a stan!Jalone MEI. In case of an,s %#ic# #ave large ranc# net%or,s6 it also allo%s ra/i! scale u/. In t#e /artners#i/ 3o!el6 MEIs 3ay contract %it# 3any an,s in an ar3s lengt# relations#i/. In t#e service co3/any 3o!el6 t#e MEI %or,s s/ecifically for t#e an, an! !evelo/s an intensive o/erational coo/eration et%een t#e3 to t#eir 3utual a!vantage. <b= The )artnership (odel uses ot# t#e financial and infrastructure strengt# of t#e an, to create lo%er cost an! faster gro%t#. 8#e Service (o3/any Mo!el #as t#e /otential to ta,e t#e ur!en of overseeing 3icrofinance o/erations off t#e 3anage3ent of t#e an, an! /ut it in t#e #an!s of MEI 3anagers %#o are focuse! on 3icrofinance to intro!uce a!!itional /ro!ucts6 suc# as in!ivi!ual loans for S"2 gra!uates6 re3ittances an! so on %it#out !isru/ting an, o/erations an! /rovi!e a 3ore a!vantageous cost structure for 3icrofinance.

29

Chapter " #ole$ Functions and %or&in' Mechanis( of Financial Institutions ".1 ICICI 8an& " # # $an% is one ban% that has developed a very clear strategy to e&pand the provision of financial products and services to the poor in ndia as a profitable activity' - Haruhi&o Euroda$ )resident$ 3sian -e0elop(ent 8an&. I(I(IBs 3icrofinance /ortfolio #as een increasing at an i3/ressive s/ee!. Ero3 106000

3icrofinance clients in 20016 I(I(I 'an, is no% <2004= len!ing to 1.) 3illion clients t#roug# its /artner 3icrofinance institutions6 an! its outstan!ing /ortfolio #as increase! fro3 Rs. 0.20 illion <NSG4.5 3illion= to Rs. +.+) illion <NSG224 3illion=. A fe% years ago6 t#ese clients #a! never een serve! y a for3al len!ing institution. 8#ere is an increasing s#ift in t#e 3icrofinance sector fro3 grant1giving to invest3ent in t#e for3 of !e t or eCuity6 an! I(I(I elieves grant 3oney s#oul! e li3ite! to t#e creation of facilitative infrastructure. >;e nee! to sto/ sen!ing govern3ent an! fun!ing agencies t#e signal t#at 3icrofinance is not a co33ercially via le syste3?6 says /achi&et Mor$ BCecuti0e -irector of ICICI 8an&. As a result of an,s entering t#e ga3e6 t#e sector #as c#ange! ra/i!ly. >8#ere is no !eart# of fun!s to!ay6 as an,s are loo,ing into MEIs favora ly6 unli,e a fe% years ago?6 says )ad(aFa #edd2$ the CB1 of one of ICICI 8an&Gs (aFor MFI partners$ Spandana. 8an& 4ed Model 8#e an, le! 3o!el %as !erive! fro3 t#e S"21'an, lin,age /rogra3 of 9A'ARD. 8#roug# t#is /rogra36 an,s finance! Self "el/ 2rou/s <S"2s= %#ic# #a! een /ro3ote! y 92:s an! govern3ent agencies. I(I(I 'an, !re% u/ aggressive /lans to /enetrate rural areas t#roug# its S"2 /rogra3.
30

"o%ever6 rat#er t#an s/en!ing ti3e in !evelo/ing rural infrastructure of its o%n6 in 20006 I(I(I 'an, announce! 3erger of 'an, of Ma!ura <'oM=6 %#ic# #a! significant /resence in t#e rural areas of Sout# In!ia6 es/ecially 8a3il 9a!u6 %it# a custo3er ranc#es. 'an, of Ma!uraPs S"2 !evelo/3ent /rogra3 %as initiate! in 1++5. 8#roug# t#is /rogra36 it #a! for3e!6 traine! an! initiate! s3all grou/s of %o3en to un!erta,e financial activities li,e an,ing6 saving an! len!ing. 'y 20006 it #a! create! aroun! 1200 S"2s across 8a3il 9a!u an! /rovi!e! cre!it to t#e3. )artnership Models A 3o!el of 3icrofinance #as e3erge! in recent years in %#ic# a 3icrofinance institution <MEI= orro%s fro3 an,s an! on1len!s to clientsF fe% MEIs #ave een a le to gro% eyon! a certain /oint. Nn!er t#is 3o!el6 MEIs are una le to /rovi!e ris, ca/ital in large Cuantities6 %#ic# li3its t#e a!vances fro3 an,s. In a!!ition6 t#e ris, is eing entirely orne y t#e MEI6 %#ic# li3its its ris,1ta,ing. 8#is 3o!el ai3e! at synergi*ing t#e co3/arative a!vantages an! financial strengt# of t#e an, %it# social inter3e!iation6 3o ili*ation /o%er an! infrastructure of MEIs an! 92:s. 8#roug# t#is 3o!el6 I(I(I 'an, coul! save on t#e initial costs of !evelo/ing rural infrastructure an! 3icro cre!it !istri ution c#annels an! coul! ta,e a!vantage of t#e e./ertise of t#ese institutions in rural areas. Initially6 I(I(I 'an, starte! off y len!ing to MEIs an! 92:s in or!er to /rovi!e t#e necessary financial su//ort to t#eir activities. Later6 I(I(I 'an, ca3e u/ %it# a /lan %#ere t#e 92:IMEI continue! to /ro3ote t#eir 3icrofinance sc#e3es6 %#ile t#e financial reCuire3ents of t#e orro%ers. an, 3et t#e ase of 1.+ 3illion an! )4

1ther Microfinance Initiati0es As a /art of 3icrofinance initiatives in t#e agriculture sector6 I(I(I 'an, !evelo/e! Ear3er Service (enters <ES(=. An ES( %as 3anage! y an agricultural in/ut su//ly co3/any %#ic# su//lie! in/uts li,e see!s an! tec#nical ,no%#o% to t#e far3ers.
31

ES(s %ere also 3anage! y an e.tension service organi*ation %#ic# /rovi!e! in/uts6 cre!it an! tec#nology or y an 92: t#at /rovi!e! all t#e services t#at far3ers nee!e! for t#eir agricultural nee!s. ;or,ing in close association %it# far3ers6 ES(s /rovi!e! t#e3 %it# services li,e a!vice on see!s6 so%ing tec#niCues6 /est control6 %ee! control6 usage an! !osage of #er ici!es6 /estici!es an! fertili*ers an! ot#er services associate! %it# agriculture. 8#e ES(s also /rovi!e! cro/1relate! infor3ation an! services to far3ers6 a/art fro3 facilitating t#e sale of agricultural /ro!uce. 8#e ES(s arrange! to /rocure t#e /ro!uce t#roug# agents an! sol! it in organi*e! agricultural 3ar,ets t#us getting etter reali*ation. The Future 8#ese agents contact several orro%ers6 t#us e./an!ing t#e reac# of I(I(I 'an, at a lo% cost. 8a,ing t#e ES( initiative furt#er6 I(I(I 'an, /lans to /rovi!e far3ers cre!it fro3 sugar co3/anies6 see! co3/anies6 !airy co3/anies6 92:s6 3icro1cre!it institutions an! foo! /rocessing in!ustries. SI2 #as een involve! in a /ro7ect in t#e sout#ern state of 8a3il 9a!u to fin! out #o% %ireless tec#nology can e a//lie! in t#e !evelo/3ent of lo% cost 3o!els of an,ing. Anot#er /lan to increase t#e reac# in rural areas is to launc# 3o ile A8M services. I(I(I 'an, ran!e! truc,s #ave starte! carrying A8Ms t#roug# a nu3 er of villages So(e 3rticles of /e5s )aper, 1. ICICI 8an& to offer (icro-finance to seC-5or&ers Mu(bai$ March 1!, In a novel %ay to #el/ se.1%or,ers to live 3ore 3eaningfully6 countryPs largest /rivate sector an,6 I(I(I 'an, is /lanning to offer financial assistance to t#e3 t#oug# t#e 3icro1finance route. Eor starters6 t#e an, /lans to launc# t#e /rogra33e in 5ol,ata y entering into a tie1u/ %it# Dur ar Ma#ila Sa3%anaya Sa3itee6 an 92: %or,ing for t#e %elfare of aroun! &56000 se.1 %or,ers in an! aroun! t#e city. Source$ <Press 8rust of In!ia= Poste! online$ ;e!nes!ay6 Marc# 146 2004 at 20$54 #ours IS8
32

2. ICICI 8an& launches ne5 initiati0e in (icro-finance I(I(I 'an, #as ta,en a sta,e of un!er 20 /er cent in Einancial Infor3ation 9et%or, an! :/erations Private Lt! <EI9:=6 %#ic# %as launc#e! on 8#urs!ay6 Huly 136 2001. EI9: %oul! /rovi!e tec#nological solutions as %ell as services to finance /rovi!ers to reac# t#e un!erserve! in t#e country. I(I(I 'an, is t#e lea! facilitator. Accor!ing to Mr /achi&et Mor6 De/uty Managing Director6 I(I(I 'an,6 EI9: is an in!e/en!ent entity. @;e %oul! re!uce our sta,e in t#e co3/any %#en reCuire!6@ #e sai!. I(I(I 'an, e./ects to target 200 3icro1finance institutions <MEIs= y Marc# 20046 #e sai!6 s/ea,ing on t#e si!elines of t#e /ress conference to launc# EI9:. At /resent6 t#e an, #as tie1 u/s %it# 100 MEIs. EI9: is an initiative in t#e 3icro1finance sector. It %oul! target 3001400 3illion /eo/le %#o !o not #ave access to asic financial services6 sai! Mr Manis# 5#era6 (-:6 EI9:. 8#e co3/any #as an aut#orise! ca/ital of Rs 50 crore. MEIs6 9'E(s6 RR's6 co1o/erative an,s6 etc %oul! !irectly or in!irectly tie u/ %it# EI9: to use its services6 #e sai!. EI9: %oul! c#arge Rs 25130 /er account every year. Core ban&in' products EI9: #as /artnere! %it# I'M an! i1fle. to offer core an,ing /ro!ucts. It %oul! also /rovi!e cre!it ureau services6 %#ic# inclu!es in!ivi!ual custo3er cre!it rating an! analytics ase! on transaction #istory. It also launc#e! io3etric car!s for custo3ers6 %#ic# %oul! e a /roof of i!entity an! give collateral to t#e3. 8#e car! %oul! also offer 3ulti/le /ro!ucts inclu!ing savings6 loans6 insurance6 recurring !e/osits6 fi.e! !e/osits an! re3ittances. 8#e co3/any %oul! also uil!1u/ custo3er !ata ase6 t#us ringing t#e3 into 3ainstrea3 an,ing. @8#ere %as a nee! for auto3ate! structure! !ata syste3 li,e EI9:6@ sai! Mr Mor. @-ssential /ieces of infrastructure are 3issing in In!ia. ;e lac, cre!it1trac,ing 3ec#anis3F t#erefore t#ere %as a nee! for an intervention li,e EI9:.@
33

8#e co3/any e./ects to reac# 25 3illion custo3ers in five years an! t%o 3illion custo3ers y t#e en! of 2004. EI9: ai3s ringing scale to @3icro@ usiness lea!ing to lo%ering of costs for t#e local financial institutions <LEIs= an! act as an internal tec#nology !e/art3ent for t#e LEIs6 sai! Mr Ehera. 8#e co3/any is %or,ing on /rovi!ing tec#nological solutions in insurance6 es/ecially t#e #ealt# insurance sector to t#e un!er1/rivilege!6@ #e sai!. It is interacting %it# 9a ar!6 SID'I an! ot#er an,s to give s#a/e to %#at EI9: !oes6 sai! Mr 5#era. 3. ICICI 8an&Hs thrust on (icro-finance ("-99AI6 MAR(" +. I(I(I 'an, #as entere! into /artners#i/s %it# various 3icrofinance institutions <MEI= an! non12overn3ent organisations <92:s= to scale u/ its 3icro len!ing usiness. A!!ressing /ress/ersons #ere6 to!ay6 9ac#i,et Mor6 -.ecutive Director6 I(I(I 'an,6 sai!6 t#e /artners#i/ 3o!el %oul! /rovi!e assure! source of fun!ing to 92:s an! MEIs. 8#e an, #a! e.ten!e! a!vances to t#e tune of Rs. 150 crores as on Ee ruary 2+6 t#is year6 un!er t#is sc#e3e6 Mr. Mor said. 8#e an, #a! acCuire! a net%or, of self1#el/ grou/s <S"2s= !evelo/e! y t#e erst%#ile 'an, of Ma!ura after its 3erger %it# I(I(I 'an,. Since t#en t#e S"2 /rogra33e #a! gro%n su stantially an! 106145 grou/s #a! een /ro3ote! reac#ing out to 2.03 la,# %o3en s/rea! across 263+) villages6 t#e -.ecutive Director sai!. :ne of t#e 3icro finance institutions6 QMicrocre!it Eoun!ation of In!iaP6 esta lis#e! y 5. M. 8#iagara7an6 for3er (#air3an of 'an, of Ma!ura in 20026 #a! initiate! a /rogra33e for 3icrocre!it t#roug# self1#el/ grou/s. I(I(I 'an, #as entere! into a 3e3oran!u3 of un!erstan!ing %it# Microcre!it Eoun!ation to outsource S"2 !evelo/3ent6 3aintenance of grou/s6 cre!it lin,age an! recovery of loans.

The MFI as Collection 3'ent

34

8o a!!ress t#ese constraints6 I(I(I 'an, initiate! a /artners#i/ 3o!el in 2002 in %#ic# t#e MEI acts as a collection agent instea! of a financial inter3e!iary. 8#is 3o!el is uniCue in t#at it co3 ines !e t as 3e**anine finance to t#e MEI <Me**anine finance co3 ines !e t an! eCuity financing$ it is !e t t#at can e converte! y t#e len!er into eCuity in t#e event of a !efault. 8#is source of financing is a!vantageous for MEIs ecause it is treate! li,e eCuity in t#e alance1 s#eet an! ena les it to raise 3oney %it#out a!!itional eCuity6 %#ic# is an e./ensive financing source.=.8#e loans are contracte! !irectly et%een t#e an, an! t#e orro%er6 so t#at t#e ris, for t#e MEI is se/arate! fro3 t#e ris, in#erent in t#e /ortfolio. 8#is 3o!el is t#erefore li,ely to #ave very #ig# leveraging ca/acity6 as t#e MEI #as an assure! source of fun!s for e./an!ing an! !ee/ening cre!it. I(I(I c#ose t#is 3o!el ecause it e./an!s t#e retail o/erations of t#e an, y leveraging co3/arative a!vantages of MEIs6 %#ile avoi!ing costs associate! %it# entering t#e 3ar,et !irectly. Securiti@ation Anot#er %ay to enter into /artners#i/ %it# MEIs is to securiti*e 3icrofinance /ortfolios. In 20046 t#e largest ever securiti*ation !eal in 3icrofinance %as signe! et%een I(I(I 'an, an! S"ARMicrofinance Lt!6 a large MEI o/erating in rural areas of t#e state of An!ra Pra!es#. 8ec#nical assistance an! t#e collateral !e/osit of NSG3256000 <+3M of t#e guarantee reCuire! y I(I(I= %ere su//lie! y 2ra3een Eoun!ation NSA. Nn!er t#is agree3ent6 I(I(I /urc#ase! a /art of S"AR-Bs 3icrofinance /ortfolio against a consi!eration calculate! y co3/uting t#e 9et Present Ralue of receiva les a3ounting to Rs. 215 3illion <NSG4.+ 3illion= at an agree! !iscount rate. 8#e interest /ai! y S"AR- is al3ost 4M less t#an t#e rate /ai! in co33ercial loans. Partial cre!it /rovision %as /rovi!e! y S"AR- in t#e for3 of a guarantee a3ounting to )M of t#e receiva les un!er t#e /ortfolio6 y %ay of a lien on fi.e! !e/osit. 8#is !eal frees u/ eCuity ca/ital6 allo%ing S"AR- to scale u/ its len!ing. :n t#e ot#er #an!6 it allo%s I(I(I 'an, to reac# ne% 3ar,ets. An! y tra!ing t#is #ig# Cuality asset in ca/ital 3ar,ets6 t#e an, can #e!ge its o%n ris,s.

8e2ond Microcredit

35

Microfinance !oes not only 3ean 3icrocre!it6 an! I(I(I !oes not li3it itself to len!ing. I(I(IBs Social Initiative 2rou/6 along %it# t#e ;orl! 'an, an! I(I(I Lo3 ar!6 t#e insurance co3/any set u/ y I(I(I an! (ana!a Lo3 ar!6 #ave !evelo/e! In!iaBs first in!e.1 ase! insurance /ro!uct. 8#is insurance /olicy co3/ensates t#e insure! against t#e li,eli#oo! of !i3inis#e! agricultural out/utIyiel! resulting fro3 a s#ortfall in t#e antici/ate! nor3al rainfall %it#in t#e !istrict6 su 7ect to a 3a.i3u3 of t#e su3 insure!. 8#e insurance /olicy is lin,e! to a rainfall in!e.. Technolo'2 :ne of t#e 3ain c#allenges to t#e gro%t# of t#e 3icrofinance sector is accessi ility. 8#e In!ian conte.t6 in %#ic# 40M of t#e /o/ulation lives in rural areas6 reCuires ne%6 inventive c#annels of !elivery. 8#e use of tec#nologies suc# as ,ios,s an! s3art car!s %ill consi!era ly re!uce transaction costs %#ile i3/roving access. 8#e I(I(I 'an, tec#nology tea3 is !evelo/ing a series of innovative /ro!ucts t#at can #el/ re!uce transaction costs consi!era ly. Eor e.a3/le6 it is /iloting t#e usage of s3art car!s %it# Se%a 'an, in A#3e!a a!. 8o 3a.i3i*e t#e enefits of t#ese innovations6 t#e !evelo/3ent of a #ig# Cuality s#are! an,ing tec#nology /latfor3 %#ic# can e use! y MEIs as %ell as y coo/eratives an,s an! regional rural an,s is nee!e!. I(I(I is strongly encouraging suc# an effort to ta,e /lace. ;i/ro an! Infosys6 I1Ele.6 3iInfotec#6 so3e of t#e est In!ian infor3ation tec#nology co3/anies s/eciali*e! in financial services6 an! ot#ers6 are in t#e /rocess of !evelo/ing e.actly suc# a /latfor3. At a recent tec#nology %or,s#o/ at t#e Institute for Einancial Manage3ent Researc# in (#ennai6 t#e I(I(I 'an, Alternate (#annels 8ea3 /resente! t#e enefits of investing in a co33on tec#nology /latfor3 si3ilar to t#ose use! in 3ainstrea3 an,ing to so3e of t#e 3ost /ro3ising MEIs. The Centre for Microfinance #esearch I(I(I an, #as create! t#e (entre for Microfinance Researc# <(MER= at t#e Institute for Einancial Manage3ent Researc# <IEMR= in (#ennai. 8#roug# researc#6 researc#1 ase! a!vocacy6 #ig# level training an! strategy uil!ing6 it ai3s to syste3atically esta lis# t#e lin,s et%een increase! access to financial services an! t#e /artici/ation of /oor /eo/le in t#e larger econo3y. 8#e (MER Researc# Nnit su//orts initiatives ai3e! at un!erstan!ing an! analy*ing t#e follo%ing issues$ i3/act of access to financial servicesF contract an! /ro!uct !esignsF
36

constraints to #ouse#ol! /ro!uctivityF co3 ination of 3icrofinance an! ot#er !evelo/3ent interventionsF evi!ence of cre!it constraintsF costs an! /rofita ility of 3icrofinance organi*ationsF i3/act of MEI /olicies an! strategiesF /eo/leBs e#avior an! /syc#ology %it# res/ect to financial servicesF econo3ics of 3icro1enter/risesF an! t#e effect of regulations. Einally6 t#e (MER recogni*es t#at %#ile MEIs ai3 to 3eet t#e cre!it nee!s of /oor #ouse#ol!s6 t#ere are ot#er 3issing 3ar,ets an! constraints facing #ouse#ol!s6 suc# as #ealt#care6 infrastructure6 an! ga/s in ,no%le!ge. 8#ese #ave i3/lications in ter3s of t#e scale an! /rofita ility of client enter/rises an! efficiency of #ouse#ol! u!get allocation6 %#ic# in turn i3/acts #ouse#ol! %ell1 eing. 8#e (MER Microfinance Strategy Nnit %ill a!!ress t#ese issues t#roug# a series of %or,s#o/s %#ic# %ill ring toget#er MEI /ractitioners an! sectoral e./erts <in energy6 %ater6 roa!s6 #ealt#6 etc=. 8#e latter %ill ring to t#e ta le ,no%le!ge of est /ractices in t#eir s/ecific areas6 an! eac# consultation %or,s#o/ %ill result in long1ter3 colla oration et%een %it# MEIs for i3/le3enting s/ecific /ilots.

".2 8andhan <#an&ed 2nd b2 Forbes Ma'a@ine in -ece(ber 299*= 'an!#an is %or,ing to%ar!s t#e t%in o 7ective of /overty alleviation an! %o3en e3/o%er3ent. It starte! as a (a/acity 'uil!ing Institution <('I= in 9ove3 er 2000 un!er t#e lea!ers#i/ of Mr. (#an!ra S#e,#ar 2#os#. During suc# ti3e6 it %as giving ca/acity uil!ing su//ort to local 3icrofinance institutions %or,ing in ;est 'engal. 'an!#an o/ene! its first 3icrofinance ranc# at 'agnan in "o%ra# !istrict of ;est 'engal in Huly 2002. 'an!#an starte! %it# 2 ranc#es in t#e year 2002103 only in t#e state of ;est 'engal an! to!ay it #as gro%n as strong as 412 ranc#es across & states of t#e countryS 8#e organi*ation #a! recor!e! a gro%t# rate of 500M in t#e year 2003104 an! &11M in t#e year 2004105. 8ill !ate6 it #as !is urse! a total of Rs. 5)4 crores a3ong al3ost 4 la,# /oor %o3en. Loan outstan!ing
37

stan!s at Rs. 221 crores. 8#e re/ay3ent rate is recor!e! at ++.++M. 'an!#an #as staff strengt# of 3ore t#an 2130 e3/loyees.

3s on Iul2 299+
Column1 Column2

9o. of states 9o. of ranc#es 9o. of 3e3 ers 9o. of staff (u3ulative loan !is urse! Loan outstan!ing 1perational Methodolo'2

$) $ 52) $ 161)26441 $ 361+1 $ Rs.1624+ crores $ Rs. 414 crores

'an!#an follo%s a grou/ for3ation6 in!ivi!ual len!ing a//roac#. A grou/ of 10125 3e3 ers are for3e!. 8#e clients #ave to atten! t#e grou/ 3eetings for 2 successive %ee,s. 2 %ee,s #ence6 t#ey are entitle! to receive loans. 8#e loans are !is urse! in!ivi!ually an! !irectly to t#e 3e3 ers.

Bcono(ic and Social 8ac&'round of Clients

Lan!less an! asset less %o3en Ea3ily of 5 3e3 ers %it# 3ont#ly inco3e less t#an Rs. 26500 in rural an! Rs. 36500 in ur an 8#ose %#o !o not o%n 3ore t#an 50 !eci3al <1I2acre= of lan! or ca/ital of its eCuivalent value

4oan Si@e 8#e first loan is et%een Rs. 16000 J Rs. 46000 for t#e rural areas an! et%een Rs. 16000 J Rs. 106000 for t#e ur an areas. After t#e re/ay3ent6 t#ey are entitle! to receive a su seCuent loan %#ic# is Rs 16000 1 56000 3ore t#an t#e /revious loan.
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Ser0ice Char'e 'an!#an c#arges a service c#arge of 12.50M flat on loan a3ount. 'an!#an initially c#arge! 14.50M. "o%ever fro3 1st Huly 20056 it #as slas#e! !o%n its len!ing rate to 15.00M. 8#en it %as furt#er re!uce! to 12.50M in May 200&. 8#e reason is o vious. As overall /ro!uctivity increase!6 o/erational costs !ecrease!. 'an!#an6 eing a non /rofit organi*ation %ante! t#e enefit of lo% costs to ulti3ately tric,le !o%n to t#e /oor. Monitorin' S2ste( 8#e various features of t#e 3onitoring syste3 are$

A 3 tier 3onitoring syste3 J Region6 Division an! "ea! :ffice -asy re/orting syste3 %it# a /rescri e! c#ec,list for3at Accounta ility at all levels /ost 3onitoring /#ase (ross1 c#ec,ing at all t#e levels 8#e 3anage3ent tea3 of 'an!#an s/en!s +0.00M of ti3e at t#e fiel!

4iabilit2 structure for 4oans ;#en a 3e3 er %ants to 7oin 'an!#an6 s#e at first #as to get in!ucte! into a grou/. After s#e gets in!ucte! into t#e grou/6 t#e entire grou/ /ro/oses #er na3e for a loan in t#e Resolution 'oo,. 8%o 3e3 ers of t#e grou/ along %it# t#e 3e3 erBs #us an! #ave to sign as guarantors in #er loan a//lication for3. If s#e fails to /ay #er %ee,ly install3ent6 t#e grou/ inserts /eer /ressure on #er. 8#e sole /ur/ose of t#e a ove structure is si3/ly to create /eer /ressure. ".3 ra(een 8an&

8#e 2ra3een Mo!el %#ic# %as /ioneere! y Prof Mu#a33e! Ounus of 2ra3een 'an, is /er#a/s t#e 3ost %ell ,no%n6 a!3ire! an! /ractise! 3o!el in t#e %orl!. 8#e 3o!el involves t#e follo%ing ele3ents.

39

"o3ogeneous affinity grou/ of five -ig#t grou/s for3 a (entre (entre 3eets every %ee, Regular savings y all 3e3 ers Loan /ro/osals a//rove! at (entre 3eeting Loan !is urse! !irectly to in!ivi!uals All loans re/ai! in 50 instal3ents

8#e 2ra3een 3o!el follo%s a fairly regi3ente! routine. It is very cost intensive as it involves uil!ing ca/acity of t#e grou/s an! t#e custo3ers /assing a test efore t#e len!ing coul! start. 8#e grou/ 3e3 ers ten! to e selecte! or at least strongly vette! y t#e an,. :ne of t#e reasons for t#e #ig# cost is t#at staff 3e3 ers can con!uct only t%o 3eetings a !ay an! t#us are occu/ie! for only a fe% #ours6 usually early 3orning or late in t#e evening. 8#ey %ere use! a!!itionally for accounting %or,6 ut t#at can no% e !one 3ore cost effectively using co3/uters. 8#e 3o!el is also rat#er 3eeting intensive %#ic# is fine as long as t#e 3e3 ers #ave no alternative use for t#eir ti3e ut can e a /ro le3 as 3e3 ers go u/ t#e inco3e la!!er. 8#e greatness of t#e 2ra3een 3o!el is in t#e si3/licity of !esign of /ro!ucts an! !elivery. 8#e /rocess of !elivery is scala le an! t#e 3o!el coul! e re/licate! %i!ely. 8#e focus on t#e /oorest6 %#ic# is a value attri ute of 2ra3een6 #as also 3a!e t#e 3o!el a favourite a3ong t#e !onor co33unity. "o%ever6 t#e 2ra3een 3o!el %or,s only un!er certain assu3/tions. As all t#e loans are only for enter/rise /ro3otion6 it assu3es t#at all t#e /oor %ant to e self1e3/loye!. 8#e re/ay3ent of loans starts t#e %ee, after t#e loan is !is urse! J t#e in#erent assu3/tion orro%ers can service t#eir loan fro3 t#e e.1ante inco3e. ".! SES Microfinance <CB1-Ji&ra( 3&ula= eing t#at t#e

40

Many co3/anies say t#ey /rotect t#e interests of t#eir custo3ers. Rery fe% actually sit in !irt %it# t#e36 using stones6 flo%ers6 stic,s6 an! c#al, /o%!er to figure out if t#ey %ill e a le to re/ay a G20 loan at G1 a 3ont#. ;it# t#is a//roac#6 t#is co3/any #as create! its o%n loyal gang of over 2 3illion custo3ers. Its orro%ers inclu!e agricultural la orers6 3o31an!1/o/ entre/reneurs6 street ven!ors6 #o3e ase! artisans6 an! s3all scale /ro!ucers6 eac# living on less t#an G2 a !ay. It %or,s on a 3o!el t#at %oul! allo% 3icro1finance institutions to scale u/ Cuic,ly so t#at t#ey %oul! never #ave to turn /oor /erson a%ay. Its 3o!el is ase! on 3 /rinci/les1 1. 3dopt a profit-oriented approach in order to access co((ercial capital- Starting %it# t#e /itc# t#at t#ere is a #ig# entre/reneurial s/irit a3ongst t#e /oor to raise t#e fun!s6 S5S converte! itself to for1/rofit status as soon as it got rea, even an! got /#ilant#ro/ist Ravi Re!!y to e a foun!ing investor. 8#en it secure! 3oney fro3 /arties suc# as Nnitus6 a Seattle ase! 92: t#at #el/s /ro3ote 3icro1financeF SID'IF an! tec#nology entre/reneur Rino! 5#osla. Later6 it %as a le to attract 3ulti3illion !ollar lines of cre!it fro3 (iti an,6 A'9 A3ro6 an! ot#ers. 2. Standardi@e products$ trainin'$ and other processes in order to boost capacit2- 8#ey collect stan!ar! re/ay3ents in roun! nu3 ers of 25 or 30 ru/ees. Internally6 t#ey #ave factory style training 3o!els. 8#ey enroll a out 500 loan officers every 3ont#. 8#ey /artici/ate in t#eory classes on Satur!ays an! /ractice %#at t#ey #ave learne! in t#e fiel! !uring t#e %ee,. 8#ey #ave s#ortene! t#e training ti3e for a loan officer to 2 3ont#s t#oug# t#e average ti3e ta,en y ot#er in!ustry /layers is 41& 3ont#s. 3. ?se Technolo'2 to reduce costs and li(it errors- It coul! not fin! t#e soft%are t#at suite! its reCuire3ents6 so it t#ey uilt t#eir o%n si3/le an! user frien!ly a//lications t#at a co3/uter1illiterate loan officer %it# a 12 t# gra!e e!ucation can easily un!erstan!. 8#e syste3 is also internet ena le!. 2iven t#at electricity is unrelia le in 3any areas t#ey #ave installe! car atteries or gas /o%ere! generators as ac,1u/s in 3any areas. Scalin' up Custo(er 4o2alt2
41

Instea! of as,ing illiterate villagers to !escri e t#eir seasonal /attern of cas# flo%s6 t#ey encourage t#e3 to use colore! c#al, /o%!er an! flo%ers to 3a/ out t#e village on t#e groun! an! tell %#ere t#e /oorest /eo/le live!6 %#at ,in! of financial /ro!ucts t#ey nee!e!6 %#ic# areas %ere lor!e! over y %#ic# loan s#ar,s6 etc. 8#ey set /eo/leBs tiny %ee,ly re/ay3ents as lo% as G1 /er %ee, an! #ealt# an! %#ole life insurance /re3iu3s to e G10 a year an! 25 cents /er %ee, res/ectively. 8#ey also offer interest free e3ergency loans. 8#e salaries of loan officers are not tie! to re/ay3ent rates an! t#ey 7ourney on 3o/e!s to orro%ersB villages an! sc#e!ule loan 3eetings as early as 4.00 A.M. Dee/ custo3er loyalty ulti3ately results in a re/ay3ent rate of ++.5M. 4e0era'in' the SES brand Its /ayoff co3es fro3 #ig# volu3es. 8#ey are gro%ing at 200M annually6 a!!ing 50 ranc#es an! 16&06000 ne% custo3ers a 3ont#. 8#ey are also using t#eir !ee/ !istri ution c#annels for selling soa/6 clot#es6 consu3er electronics an! ot#er /ac,age! goo!s.

Chapter 6 Mar&etin' of Microfinance )roducts 1. Contract Far(in' and Credit 8undlin' 'an,s an! financial institutions #ave een /artners in contract far3ing sc#e3es6 set u/ to en#ance cre!it. 'asically6 t#is is a !oa le 3o!el. Nn!er suc# an arrange3ent6 cro/ loans can e e.ten!e! un!er tie1u/ arrange3ents %it# cor/orate for /ro!uction of #ig# Cuality /ro!uce %it# sta le 3ar,eting arrange3ents /rovi!e! J an! only6 /rovi!e! J t#e /rice setting 3ec#anis3 for t#e far3er is a//ro/riate an! fair. 2. 3'ri Ser0ice Centre D #abo India Ra o In!ia Einance Pvt Lt!. #as esta lis#e! agri1service centres in rural areas in coo/eration %it# a nu3 er of agri1in/ut an! far3 services co3/anies. 8#e services /rovi!e! are si3ilar to t#ose in contract far3ing6 ut %it# a!!itional fle.i ility an! a %i!er range of /ro!ucts inclu!ing inventory finance. 'esi!es /rovi!ing storage facilities6 eac# centre rents out far3 3ac#inery6
42

/rovi!es agricultural in/uts an! infor3ation to far3ers6 arranges cre!it6 sells ot#er services an! /rovi!es a foru3 for far3ers to 3ar,et t#eir /ro!ucts. 3. /on Traditional Mar&ets Si3ilarly6 Mot#er Dairy Eoo!s Processing6 a %#olly o%ne! su si!iary of 9ational Dairy Develo/3ent 'oar! <9DD'= #as esta lis#e! auction 3ar,ets for #orticulture /ro!ucers in 'angalore. 8#e o/erations an! 3aintenance of t#e 3ar,et is !one y 9DD'. 8#e /ro7ect6 %it# an outlay of Rs.15 la,#6 covers 200 #orticultural far3ers associations %it# 506000 gro%er 3e3 ers for %#olesale 3ar,eting. 8#eir /ro!uce is /lanne! %it# /ro!uction an! su//ly assurance an! /rovi!es ot# gro%ers an! uyers a co33on /latfor3 to negotiate etter rates.

!. 3pni Mandi Anot#er innovation is t#at of 8#e Pun7a Man!i 'oar!6 %#ic# #as e./eri3ente! %it# a Afar3ersB 3ar,etB to /rovi!e s3all far3ers locate! in /ro.i3ity to ur an areas6 !irect access to consu3ers y eli3ination of 3i!!le3en. 8#is e./eri3ent ,no%n as @A/ni Man!i@ elongs to ot# far3ers an! consu3ers6 %#o 3utually #el/ eac# ot#er. Nn!er t#is arrange3ent a su3 of Rs. 5.2 la,# is s/ent for /rovi!ing /lastic crates to 1000 far3ers. -ac# far3er gets 5 crates at a su si!i*e! rate. At t#e 3an!i site6 t#e 'oar! /rovi!es asic infrastructure facilities. At t#e far3 level6 e.tension services of !ifferent agencies are /oole! in. 8#ese inclu!e in/uts su si!ies6 etter Cuality see!s an! loans fro3 'an,s. A/ni Man!i sc#e3e /rovi!es self1e3/loy3ent to /ro!ucers an! #as eli3inate! social in#i itions a3ong t#e3 regar!ing t#e retail sale of t#eir /ro!uce.

43

Chapter * Success Factors of Micro-Finance in India :ver t#e last ten years6 successful e./eriences in /rovi!ing finance to s3all entre/reneur an! /ro!ucers !e3onstrate t#at /oor /eo/le6 %#en given access to res/onsive an! ti3ely financial services at 3ar,et rates6 re/ay t#eir loans an! use t#e /rocee!s to increase t#eir inco3e an! assets. 8#is is not sur/rising since t#e only realistic alternative for t#e3 is to orro% fro3 infor3al 3ar,et at an interest 3uc# #ig#er t#an 3ar,et rates. (o33unity an,s6 92:s an! grass root savings an! cre!it grou/s aroun! t#e %orl! #ave s#o%n t#at t#ese 3icroenter/rise loans can e /rofita le for orro%ers an! for t#e len!ers6 3a,ing 3icrofinance one of t#e 3ost effective /overty re!ucing strategies. 3. For / 1s 1. 8#e fiel! of !evelo/3ent itself e./an!s an! s#ifts e3/#asis %it# t#e /ull of i!eas6 an! 92:s /er#a/s 3ore rea!ily a!o/t ne% i!eas6 es/ecially if t#e resources reCuire! are s3all6 entry an! e.it are easy6 tas,s are </erceive! to e= si3/le an! /eo/leBs acce/tance is #ig# J all c#aracteristics <real or /resu3e!= of 3icrofinance.
44

2. (anvassing y various actors6 inclu!ing t#e 9ational 'an, for Agriculture an! Rural Develo/3ent <9A'ARD=6 S3all In!ustries Develo/3ent 'an, of In!ia <SID'I=6 Erien!s of ;o3enBs ;orl! 'an,ing <E;;'=6 Ras#triya Ma#ila 5os# <RM5=6 (ouncil for A!vance3ent of Peo/leBs Action an! Rural 8ec#nologies <(APAR8=6 Ras#triya 2ra3in Ri,as 9i!#i <R2R9=6 various !onor fun!e! /rogra33es es/ecially y t#e International Eun! for Agricultural Develo/3ent <IEAD=6 Nnite! 9ations Develo/3ent Progra33e <N9DP=6 ;orl! 'an, an! De/art3ent for International Develo/3ent6 N5 <DEID=T6 an! lately co33ercial an,s6 #as greatly a!!e! to t#e i!ea /ull. In!uce! y t#e %orl!%i!e focus on 3icrofinance6 !onor 92:s too #ave een fun!ing 3icrofinance /ro7ects. :ne 3ig#t call it t#e su//ly /us#.

3. All ,in!s of t#ings fro3 ,#a!i s/inning to 9a!e/ co3/ost to al%a!is !o not /ro!uce suc# concrete results an! sustaine! interest a3ong eneficiaries as 3icrofinance. Most 92:1le! 3icrofinance is %it# /oor %o3en6 for %#o3 access to s3all loans to 3eet !ire e3ergencies is a value! outco3e. 8#us6 Cuic, an! #ig# Acusto3er satisfactionB is t#e NSP t#at #as attracte! 92:s to t#is tra!e.

4. 8#e i!ea a//ears si3/le to i3/le3ent. 8#e 3ost co33on route follo%e! y 92:s is /ro3otion of S"2s. It is i3/licitly assu3e! t#at no Atec#nical s,illB is involve!. 'esi!es6 e.ternal resources are not nee!e! as S"2s egin %it# t#eir o%n savings. 8#ose 92:s t#at #ave access to revolving fun!s fro3 !onors !o not #ave to %orry a out financial /erfor3ance any %ay. 8#e c#ic,ens %ill eventually co3e #o3e to roost ut in t#e first flus#6 it see3s all so easy.

5. Eor 3any 92:s t#e i!ea of AorganisingB J for3ing a sa3u#a J #as in#erent a//eal. 2rou/s connote e3/o%er3ent an! organising %o3en is a !ou le onus.

45

&. Einally6 to 3any 92:s6 3icrofinance is a %ay to financial sustaina ility. -s/ecially for t#e 3e!iu31to1large 92:s t#at are a le to access ul, fun!s for on1len!ing6 for e.a3/le fro3 SID'I6 t#e interest rate s/rea! coul! e an attractive source of revenue t#an an uncertain6 #ig#ly co3/etitive an! increasingly !ifficult1to1raise !onor fun!ing.

8. For Financial Institutions and ban&s Microfinance #as een attractive to t#e len!ing agencies ecause of !e3onstrate! sustaina ility an! of lo% costs of o/eration. Institutions li,e SID'I an! 9A'ARD are #ar! nose! an,ers an! %oul! not %or, %it# t#e i!ea if t#ey !i! not see a long ter3 engage3ent J %#ic# only co3es out of sustaina ility <t#at is econo3ic attractiveness=. :n t#e su//ly si!e6 it is also true t#at it #as all t#e tra//ings of a usiness enter/rise6 its out/ut is tangi le an! it is easily un!erstoo! y t#e 3ainstrea3. 8#is also see3s to soun! nice to t#e govern3ent6 %#ic# in t#e /ost li eralisation era is trying to e./lain t#e logic of every ru/ee s/ent. 8#at is t#e reason %#y 3icrofinance #as attracte! 3ainstrea3 institutions li,e no ot#er !evelo/3ental /ro7ect. Per#a/s t#e 3ost i3/ortant factor t#at got an,s involve! is %#at one 3ig#t call t#e /olicy /us#. 2iven t#at 3ost of our an,s are in t#e /u lic sector6 /u lic /olicy !oes #ave so3e influence on %#at t#ey %ill or %ill not !o. In t#is case6 /olicy %as follo%e! y !iligent6 if 3ean!ering6 /ro3otional %or, y 9A'ARD. 8#e /olicy c#ange a out a !eca!e ago y R'I to allo% an,s to len! to S"2s %as initially follo%e! y a seven1/age 3e3o y 9A'ARD to all an, c#air3en6 an! later y sensitisation an! training /rogra33es for an, staff across t#e country. Several #un!re! suc# /rogra33es %ere con!ucte! y 92:s alone6 eac# involving 15 to 20 an, staff6 all /ai! for y 9A'ARD. 8#e /olicy /us# %as s%eetene! y t#e 9A'ARD refinance sc#e3e t#at offers 3uc# 3ore favoura le ter3s <100M refinance6 %i!er s/rea!= t#an for ot#er rural len!ing y an,s. 9A'ARD also !i! so3e syste3 setting %or, an! an,s lately #ave een given targets. 8#e canvassing6 training6 refinance an! close follo% u/ y 9A'ARD #as resulte! in %i!es/rea! an, involve3ent.
46

Moreover6 for an,s t#e o/erating cost of 3icrofinance is /er#a/s 3uc# less t#an for /ure MEIs. 8#e an,s alrea!y #ave a vast net%or, of ranc#es. 8o t#e e.tent t#at an 92: #as alrea!y /ro3ote! S"2s an! t#e S"2 /ortfolio is /erfor3ing etter t#an t#e rest of t#e rural <if not t#e entire= /ortfolio6 3icrofinance via S"2s in t#e %orst case %oul! re/resent 3arginal a!!ition to cost an! %oul! often re!uce 3arginal cost t#roug# etter ca/acity utilisation. In t#e /rocess t#e an, also earns ro%nie /oints %it# /olicy 3a,ers an! 3eets its /riority sector targets. It !oes not ta,e 3uc# analysis to figure out t#at t#e 3ar,et for financial services for t#e 501&0 3illion /oor #ouse#ol!s of In!ia6 cou/le! %it# a out t#e sa3e nu3 er %#o are tec#nically a ove t#e /overty line ut are severely un!er1serve! y t#e financial sector6 is a very large one. Moreover6 as in any e3erging 3ar,et6 t#oug# t#e /erceive! ris,s are #ig#er6 t#e s/rea!s are 3uc# greater. 8#e tra!itional co33ercial 3ar,ets of cor/orates6 usiness6 tra!e6 an! no% even #ousing an! consu3er finance are eing soug#t y all t#e an,s6 lea!ing to /rice co3/etition an! %afer t#in s/rea!s. Eurt#er6 an,1grou/s are 3otivate! y a nu3 er of cross1selling o//ortunities in t#e 3ar,et6 for !e/osits6 insurance6 re3ittances an! eventually 3utual fun!s. Since t#e larger an,s are offering all t#ese services no% t#roug# t#eir grou/ co3/anies6 it eco3es i3/erative for t#e3 to e./an! t#eir !istri ution c#annels as far an! !ee/ as /ossi le6 in t#e #o/e of ca/turing t#e entire financial services usiness of a #ouse#ol!. Einally6 ot# agri1in/ut an! /rocessing co3/anies suc# as -ID Parry6 fast13oving consu3er goo!s <EM(2= co3/anies suc# as "in!ustan Levers6 an! consu3er !ura le co3/anies suc# as P#ili/s #ave realise! t#e /otential of t#is ig 3ar,et an! are actively using S"2s as entry /oints. So3e a3ount of free1ri!ing is ta,ing /lace #ere y co3/anies6 for t#ey are using c#annels %#ic# %ere uilt at a significant cost to 92:s6 fun!ing agencies an!Ior t#e govern3ent. :n t#e %#ole6 t#e econo3ic attractiveness of 3icrofinance as a usiness is getting esta lis#e! an! t#is is a sure ste/ to%ar!s 3ainstrea3ing. ;e ,no% t#at 3ainstrea3ing is a 3i.e! lessing6 an! one ten!s to e.c#ange scale at t#e cost of o 7ectives. So it nee!s to e %atc#e! carefully.
47

3 real life BCa(ples , La,s#3i6 a 221year1ol! sc#ool !ro/out6 live! in a re3ote village of 8a3il 9a!u. Instea! of getting 3arrie! an! starting a fa3ily li,e any ot#er village girl of #er age in In!ia6 s#e %ante! to set u/ on #er o%n usiness. La,s#3i starte! an Internet ,ios, in #er village6 offering services li,e e13ail6 Internet c#at an! ti/s on #ealt# an! e!ucation. 8#e ,ios, %as /artially finance! y I(I(I 'an, an! %as set u/ in association %it# n1Logue (o33unications. Lat#a6 a 2+1year1ol! 3arrie! %o3an %it# t#ree c#il!ren orro%e! Rs.1)6000 to set u/ a s3all /rovision store in 5ot#ai/alli6 a s3all village6 in t#e nort# of An!#ra Pra!es#. ;it#in a year6 s#e starte! earning Rs.3500 a 3ont# fro3 t#e store. ;it# t#is 3oney6 s#e %as a le to /rovi!e #er c#il!ren a goo! e!ucation at a local /rivate sc#ool. S#e %as a /art of a self #el/ grou/ in An!#ra Pra!es# %#ic# receive! financial assistance fro3 I(I(I 'an,. 8#ese are real1life e.a3/les to illustrate #o% t#e 3icro1len!ing initiatives of I(I(I 'an, affecte! t#e lives of /oor %o3en in In!ia. 'y eco3ing a /art of self1#el/ grou/s6 several rural %o3en %ere a le to 3ove out of /overty. A/art fro3 financial enefits6 t#e initiatives #el/e! t#e %o3en to !evelo/ self confi!ence6 i3/rove t#eir co33unication s,ills an! raise t#eir /osition in society. 'y eco3ing a /art of self1#el/ grou/s6 several rural %o3en %ere a le to 3ove out of /overty. A/art fro3 financial enefits6 t#e initiatives #el/e! t#e %o3en to !evelo/ self confi!ence6 i3/rove t#eir co33unication s,ills an! raise t#eir /osition in society.

48

Chapter + Issues in Microfinance

1. Sustainabilit2 8#e first c#allenge relates to sustaina ility. MEI 3o!el is co3/aratively costlier in ter3s of !elivery of financial services. An analysis of 3& lea!ing MEIs y Hin!al D S#ar3a s#o%s t#at )+M MEIs sa3/le %ere su si!y !e/en!ent an! only + %ere a le to cover 3ore t#an )0M of t#eir costs. 8#is is /artly e./laine! y t#e fact t#at %#ile t#e cost of su/ervision of cre!it is #ig#6 t#e loan volu3es an! loan si*e is lo%. It #as also een co33ente! t#at MEIs /ass on t#e #ig#er cost of cre!it to t#eir clients %#o are Ainterest insensitiveB for s3all loans ut 3ay not e so as loan si*es increase. It is6 t#erefore6 necessary for MEIs to !evelo/ strategies for increasing t#e range an! volu3e of t#eir financial services. 2. 4ac& of Capital 8#e secon! area of concern for MEIs6 %#ic# are on t#e gro%t# /at#6 is t#at t#ey face a /aucity of o%ne! fun!s. 8#is is a critical constraint in t#eir eing a le to scale u/. Many of t#e MEIs are socially oriente! institutions an! !o not #ave a!eCuate access to financial ca/ital. As a result t#ey #ave #ig# !e t eCuity ratios. Presently6 t#ere is no relia le 3ec#anis3 in t#e country for 3eeting t#e eCuity reCuire3ents of MEIs.
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8#e IP: issue y Me.ico ase! A(o3/arta3osB %as not acce/te! y /urists as t#ey t#oug#t it !efie! t#e 3ission of an MEI. 8#e IP: also roug#t fort# t#e issue of valuation of an MEI. 8#e oo, value 3ulti/le is currently t#e !o3inant valuation 3et#o!ology in 3icrofinance invest3ents. In t#e case of start u/ MEIs6 using a oo, value 3ulti/le !oes not !o 7ustice to t#e un!erlying value of t#e usiness. 8y/ically6 start u/s are loss 3a,ing an! #ence t#e oo, value continually re!uces over ti3e until t#ey #it rea, even /oint. A oo, value 3ulti/lier to value start u/s %oul! !ecrease t#e value as t#e organi*ation uses u/ ca/ital to uil! its usiness6 t#us accentuating t#e negative rat#er t#an t#e /ositive. 3. Financial ser0ice deli0er2 Anot#er c#allenge face! y MEIs is t#e ina ility to access su//ly c#ain. 8#is c#allenge can e overco3e y e./loring synergies et%een 3icrofinance institutions %it# e./ertise in cre!it !elivery an! co33unity 3o ili*ation an! usinesses o/erating %it# /ro!uction su//ly c#ains suc# as agriculture. 8#e latter /layers %#o ring %it# t#e3 an un!erstan!ing of si3ilar client seg3ents6 a ility to create 3icroenter/rise o//ortunities an! %illingness to nurture t#e36 %oul! e ,een on !irecting 3icrofinance to suc# o//ortunities. 8#is ena les MEIs to increase t#eir client ase at no a!!itional costs. 8#ose usinesses t#at /rocure fro3 rural In!ia suc# as agriculture an! !airy often i!entify finance as a constraint to value creation. Suc# c#ain 3anage3ent. I8( Li3ite!6 %it# its strong su//ly c#ain logistics6 rural /resence an! an innovative transaction /latfor36 t#e e1c#ou/al6 #as starte! e./loring synergies %it# financial service /rovi!ers inclu!ing MEIs t#roug# /ilots %it# vegeta le ven!ors an! far3ers. Si3ilarly6 large EIs suc# as S/an!ana foresee a larger role for t#e3selves in t#e rural econo3y a ly su//orte! y value creating /artners#i/s %it# /layers suc# as Ma#in!ra an! ;estern Nnion Money 8ransfer. I8( #as initiate! a /ilot /ro7ect calle! A/us#carts sc#e3eB along %it# 'ASIU <a 3icrofinance organi*ation in "y!era a!=. Nn!er t#is /ilot6 it %or,s %it# t%enty %o3en #ea! loa! ven!ors
50

usinesses 3ay fin! co3/le3entarities

et%een an MEIBs s,ills in 3anage3ent of cre!it /rocesses an! t#eir o%n strengt#s in su//ly

selling vegeta les of aroun! 101 15 ,gs /er !ay. 'ASIU e.ten!s %or,ing ca/ital loans of Rs.106000I1 6 ca/acity uil!ing an! usiness !evelo/3ent su//ort to t#e %o3en. I8( /rovi!es su//ort t#roug# su//ly c#ain innovations y$ 1. Ma,ing t#e (#ou/al Eres# stores availa le to t#e ven!ors6 t#is avoi!s t#e #assle of argaining an! unrelia ility at t#e tra!itional 3an!is <local vegeta le 3ar,ets=. 8#e %o3en are a le to re/lenis# t#e stoc, fro3 t#e stores as 3any ti3es in t#e !ay as reCuire!. 8#is #as /ositive i3/lications for Cuality of t#e /ro!uce sol! to t#e en! consu3er. 2. (ontinuously e./eri3enting to increase efficiency6 aug3enting inco3es an! re!ucing energy usage across t#e value c#ain. Eor instance6 it #as forge! a /artners#i/ %it# 9ational Institute of Design <9ID=6 a /ioneer in t#e fiel! of !esign e!ucation an! researc#6 to !esign user1frien!ly /us#carts t#at can re!uce t#e /#ysical ur!en. 3. 8a,ing lessons fro3 t#e /#ar3aceutical an! teleco3 sector to i!entify tec#nologies t#at can save energy an! ensure te3/erature control in /us# carts in or!er to 3aintain Cuality of t#e vegeta les t#roug#out t#e !ay. 8#e 3o!el aug3ents t#e inco3es of t#e ven!ors fro3 aroun! Rs.30140 /er !ay to an average of Rs.150 /er !ay. Ero3 an environ3ental /oint of vie%6 /us# carts are 3uc# 3ore energy efficient as o//ose! to fi.e! for3at retail outlets. !. H# Issues Recruit3ent an! retention is t#e 3a7or c#allenge face! y MEIs as t#ey strive to reac# 3ore clients an! e./an! t#eir geogra/#ical sco/e. Attracting t#e rig#t talent /roves !ifficult ecause can!i!ates 3ust #ave6 as a /rereCuisite6 a 3in!set t#at fits %it# t#e organi*ationBs 3ission. Many 3ainstrea3 co33ercial an,s are no% entering 3icrofinance6 %#o are /oac#ing staff fro3 MEIs an! MEIs are una le to retain t#e3 for ot#er 7o o//ortunities. )5M of t#e /oorest clients serve! y 3icrofinance are %o3en. "o%ever6 %o3en 3a,e u/ less t#an #alf of all 3icrofinance staff 3e3 ers6 an! fill even fe%er of t#e senior 3anage3ent roles. 8#e c#allenge in 3ost countries ste3s fro3 cultural notions of %o3enBs
51

roles6 for e.a3/le6 %#ile %o3en are single t#ere 3ig#t e a greater %illingness on t#e /art of %o3enBs fa3ilies to let t#e3 %or, as front line staff6 ut as soon as t#ey 3arry an! certainly once t#ey start #aving c#il!ren6 it eco3es unacce/ta le. Long !istances an! long #ours a%ay fro3 t#e fa3ily are !ifficult for %o3en to acco33o!ate an! for t#eir fa3ilies to un!erstan!.

". Microinsurance Eirst ig issue in t#e 3icroinsurance sector is !evelo/ing /ro!ucts t#at really res/on! to t#e nee!s of clients an! in a %ay t#at is co33ercially via le. Secon!ly6 t#ere is strong nee! to en#ance !elivery c#annels. 8#ese !elivery c#annels #ave een relatively %ea, so far. Microinsurance co3/anies offer 3ini3al /ro!ucts an! !o not %ant to go for%ar! an! offer co3/le. /ro!ucts t#at 3ay res/on! etter. Microinsurance nee!s a !elivery c#annel t#at #as easy access to t#e lo%1inco3e 3ar,et6 an! /refera ly one t#at #as een engage! in financial transactions so t#at t#ey #ave controls for 3anaging cas# an! t#e a ility to trac, !ifferent in!ivi!uals. 8#ir!ly6 t#ere is a nee! for 3ar,et e!ucation. Peo/le eit#er #ave no infor3ation a out 3icroinsurance or t#ey #ave a negative attitu!e to%ar!s it. ;e #ave to counter t#at. ;e #ave to so3e#o% get /eo/le 1 %it#out #aving to sit !o%n at a ta le 1 to un!erstan! %#at insurance is6 an! %#y it enefits t#e3. 8#at %ill #el/ to !e3ystify 3icroinsurance so t#at %#en agents co3e6 /eo/le are %illing to engage %it# t#e3. 6. 3d0erse selection and (oral ha@ard 8#e 7oint lia ility 3ec#anis3 #as een relie! u/on to overco3e t#e t%in issues of a!verse selection an! 3oral #a*ar!. 8#e grou/ len!ing 3o!els are contingent on t#e availa ility of s,ille! resources for grou/ /ro3otion an! entail a gestation /erio! of si. 3ont#s to one year. "o%ever6 t#ere is not sufficient un!erstan!ing of t#e !rivers of !efault an! cre!it ris, at t#e level of t#e in!ivi!ual. 8#is #as constraine! t#e !evelo/3ent of in!ivi!ual 3o!els of 3icro
52

finance. 8#e grou/ 3o!el %as an innovation to overco3e t#e s/ecific issue of t#e Cuality of t#e /ortfolio6 given t#e ina ility of t#e /oor to offer collateral. "o%ever6 fro3 t#e /ers/ective of scaling u/ 3icro financial services6 it is i3/ortant to /roactively !iscover 3o!els t#at %ill ena le !irect finance to in!ivi!uals.

#eferences 1. !e Ag#ion6 'eatri* Ar3en!Vri* D Honat#an Mor!uc#. The Economics of 8#e MI8 Press6 (a3 ri!ge6 Massac#usetts6 2005. 2. Dic#ter6 8#o3as an! Malcol3 "ar/er <e!s=. (hat)s (rong with Microfinance* Practical Action6 2004. 3. Le!ger%oo!6 Hoanna an! Rictoria ;#ite. Transforming Microfinance Providing ,ull ,inancial -ervices to the Poor. ;orl! 'an,6 200&. 4. Mas6 Ignacio an! 5a ir 5u3ar. $an%ing on mobiles+ why, how and for whom* (2AP Eocus 9ote W4)6 Huly6 200). 5. Ounus6 Mu#a33a!. #reating a (orld (ithout Poverty+ -ocial $usiness and the ,uture of #apitalism. Pu lic Affairs6 9e% Oor,6 200). &. (#urc#ill6 (raig. Eort#co3ing 1++). ndividual Micro lending #ase -tudies. 8oronto$ (al3ea!o%.
7. (onnell6 Martin. 1++). >Private -Cuity (a/ital in t#e 3icrofinance In!ustry.? In (raig

Microfinance 6

nstitutions+

(#urc#ill6 e!.6 Moving microfinance ,orward+ !wnership, #ompetition and #ontrol of microfinance nstitutions. ;as#ington D($ 3icrofinance 9et%or,.
8. :tero6 Maria. 1++). >8y/es of :%ners for 3icrofinance Institutions.? In (raig (#urc#ill6

e!.6 Moving microfinance ,orward+ !wnership, #ompetition and #ontrol of microfinance nstitutions. ;as#ington D($ 3icrofinance 9et%or,.
9. 8#e Euture of 3icrofinance in In!ia$ $y -u%hwinder -ingh /rora, ,inancial -ector

Team, Policy Division, D, D.

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10. Strategies for /overty alleviation t#roug# !ovetailing t#e /otential of 3icrofinance

/ractices %it# non1ti3 er forest /ro!ucts fro3 !i/terocar/s$ Lessons fro3 In!ia y '.P. Pet#iya. 11. In!ia 3icrofinance Invest3ent -nviron3ent Profile y Slavea (#an,ova6 9at#anael 2ol! erg6 2enevieve Melfor!6 "in! 8a*i an! S#ane 8o3lonson. 12. Anil 5 5#an!el%al6 >Microfinance Develo/3ent Strategy for In!ia?6 -cono3ic an! Political ;ee,ly6 Marc# 316 2004 13. 9ac#i,et Mor6 'in!u Anant#6 >Inclusive Einancial Syste3s1 So3e Design Princi/les an! a case stu!y?6 -cono3ic an! Political ;ee,ly6 Marc# 316 2004 14. Ri,ra3 A,ula6 >'usiness 'asics at t#e 'ase of t#e Pyra3i!?6 "arvar! 'usiness Revie%6 Hune6 200) 15. -DA Rural Syate3s Pvt Lt! in association %it# APMAS6 >Self "el/ 2rou/s in In!ia1 A Stu!y of t#e Lig#t an! S#a!es? 1&. Raven S3it#6 > 8#e (#anging Eace of Microfinance in In!ia1 8#e costs an! enefits of transfor3ing fro3 an 92: to a 9'E(?6 200& 14. R Srinivasan an! M S Srira36 >Microfinance in In!ia1 Discussion? 1). Piyus# 8i%ari an! S M Ea#a!6 "DE(6 >(once/t /a/er1 Microfinance Institutions in In!ia? 1+. 'ar ara A!ol/#6DEID6 >Rural 9on Ear3 -cono3y$ Access Eactors?6 Ee ruary6 2003 20. S#ri O S P 8#orat6 Managing Director6 9A'ARD6 >Innovation in Pro!uct Design6 (re!it Delivery an! 8ec#nology to reac# s3all far3ers?6 9ove3 er6 2005 21. S#ri O S P 8#orat6 Managing Director6 9A'ARD6 >Microfinance in In!ia$ Sectoral Issues an! (#allenges?6 May6 2005 22. Dr. ( Rangara7an6 (#air3an6 -cono3ic A!visory (ouncil to t#e Pri3e Minister6 >Microfinance an! its Euture Directions?6 May6 2005 23. Re/ort6 >Status of Microfinance in In!ia 200&12004?6 9A'ARD 24. 'in!u Anant# an! So7u Annie 2eorge6 Microfinancial Services 8ea3 of Social Initiatives 2rou/6 I(I(I 'an,6 >Scaling u/ Microfinancial Services$ An overvie% of c#allenges an! ://ortunities?6 August6 2003 25. Annie Duflo6 Researc# (o1or!inator6 (entre for Micro Einance Researc#6 >I(I(I 'an,s t#e /oor in In!ia?6 Page 136 Microfinance Matters6 Issue 146 :cto er 2005
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