1. Mumbai Education Trust (MET), Bandra
(West)
Project report on:
Micro Financial Institutions in India
SUBMITTED TO: SUBMITTED BY:
Prof. Ambdekar Nikita Vedak
PGDM(ebusiness)- Finance
Roll No- PG10055

2. INDEX:
SR.NO. TOPIC
1) Introduction to Micro financial Institution
2) Report- objective and Need
3) Methodology- Primary and secondary Data
4) Business Models
5) Case Study- SKS Microfinance Ltd.
5) Status of the Sector
2.1 Why India?

3. INTRODUCTION:
The poor, like the rest of society, need financial products and services to build assets, stabilize
consumption and protect themselves against risks. Microfinance serves as the last-mile bridge to
the low-income population excluded from the traditional financial services system and seeks to
fill this gap and alleviate poverty.
Microfinance loans serve the low-income population in multiple ways by:
(1) providing working capital to build businesses;
(2) infusing credit to smooth cash flows and mitigate irregularity in accessing food, clothing,
shelter, or education; and
(3) cushioning the economic impact of shocks such as illness, theft, or natural
disasters.
Moreover, by providing an alternative to the loans offered by the local moneylender priced at
60% to 100% annual interest, microfinance prevents the borrower from remaining trapped in a
debt trap which exacerbates poverty. The microfinance model is designed specifically to help the
low income population overcome typical challenges such as illiteracy, lack of financial
knowledge and deficiency of collateralizable assets. At the same time, the model takes advantage
of existing community support systems and networks to encourage financial discipline and
ensure high repayment rates.
The basic idea of micro-finance is simple: if poor people are provided access to financial
services, including credit, they may very well be able to start or expand a micro-enterprise that
will allow them to break out of poverty.

4. Definition of Microfinance and MFIs
The proposed Microfinance Services Regulation Bill defines microfinance
services as ―providing financial assistance to an individual or an eligible client, either
directly or through a group mechanism for :
i) an amount, not exceeding rupees fifty thousand in aggregate per individual,
for small and tiny enterprise, agriculture, allied activities (including for
consumption purposes of such individual) or
ii) an amount not exceeding rupees one lakh fifty thousand in aggregate per
individual for housing purposes, or
iii) such other amounts, for any of the purposes mentioned at items (i) and (ii)
above or other purposes, as may be prescribed.‖

5. The proposed regulations further define an MFI as ―an organisation or
association of individuals including the following if it is established for the purpose of
carrying on the business of extending microfinance services :
i) a society registered under the Societies Registration Act, 1860,
ii) a trust created under the Indian Trust Act,1880 or public trust registered under
any State enactment governing trust or public, religious or charitable purposes,
iii) a cooperative society / mutual benefit society / mutually aided society
registered under any State enactment relating to such societies or any multistate
cooperative society registered under the Multi State Cooperative
Societies Act, 2002 but not including :
�a cooperative bank as defined in clause (cci) of section 5 of the Banking
Regulation Act, 1949 or
� a cooperative society engaged in agricultural operations or industrial activity or
purchase or sale of any goods and services.‖
Microfinance is increasingly being considered as one of the most effective tools of reducing
poverty. Microfinance has a significant role in bridging the gap between the formal financial
institutions and the rural poor. The Micro Finance Institutions (MFIs) accesses financial
resources from the Banks and other mainstream Financial Institutions and provide financial and
support services to the poor.
The microfinance sector is maturing and beginning to diversify its product and service base to
address other unmet financial and non-financial needs of the low income population either
directly or by acting as a conduit for third-party providers – savings, insurance, remittance and
low cost education and healthcare services being some of the key examples.
Given this growth and maturity dynamic, the Indian microfinance sector is increasingly
becoming a viable investment sector with commercial investors joining social investors who
have been nurturing the industry thus far.
The growth of Indian MFIs has been enhanced by the availability of debt financing from both
private and public sector banks, which have significantly increased their exposure to
microfinance over the last five years. The priority sector lending (―PSL‖) requirements set by the
RBI have encouraged banks to lend to MFIs as a way to satisfy their financial inclusion quotas
for lending to agriculture and weaker and more deprived sections of society. During the 2008
liquidity crisis, some banks reduced on their exposure to microfinance, particularly to smaller
MFIs. However, the Small Industries Development Bank of India (―SIDBI‖) played an important
counter-cyclical role, and the new public sector banks such as Punjab National Bank and State
Bank of India entered as significant debt providers to Indian MFIs. As liquidity conditions eased
by early 2009, the market witnessed the entrance of non-bank debt entities such as IFMR Trust.
The large private Indian banks such as HDFC Bank and ICICI Bank that have historically lent to
Indian MFIs, have begun to increase their exposure to the microfinance sector.
Emergence of MFIs

6. Various types of institutions offer microfinance: credit unions, commercial banks, NGOs (Non-
governmental Organizations), cooperatives, and sectors of government banks. The emergence of
―for-profit‖ MFIs is growing. In India , these ‗for-profit‘ MFIs are referred to as Non-Banking
Financial Companies (NBFC). NGOs mainly work in remote rural areas thereby providing
financial services to the persons with no access to banking services.
MFIs are an extremely heterogenous group comprising NBFCs, societies, trusts and
cooperatives. They are provided financial support from external donors and apex
institutions including the Rashtriya Mahila Kosh (RMK), SIDBI Foundation for micro-
credit and NABARD and employ a variety of ways for credit delivery. Since 2000,
commercial banks including Regional Rural Banks have been providing funds to MFIs for
on lending to poor clients. Though initially, only a handful of NGOs were ―into‖ financial

7. intermediation using a variety of delivery methods, their numbers have increased
considerably today. While there is no published data on private MFIs operating in the country,
the number of MFIs is estimated to be around 800. One set of data which I have indicate that
not more than a dozen MFIs have an outreach of 1,00,000 microFinance clients. A large
majority of them operate on much smaller scale with clients ranging between 500 to 1,500 per
MFI. It is estimated that the MFIs‘ share of the total institution-based micro-credit portfolio is
about 8%.
Product Offering:
Thus far, microfinance institutions have largely limited their product and service offering even
within the confines of financial inclusion. In fact, their product innovation has been limited to
credit which is intended to serve a variety of needs as shown by the box below. The limited
product innovation is understandable given the sector‘s primary focus has been on refining its
business model and gaining scale to become financially sustainable. Despite following a single-
product model, the sector has experienced remarkable growth. This growth can only be expected
to continue as product innovation and diversified service offerings attract and retain greater
number of customers with a variety of needs.
Product Purpose
Existing Micro Business Enterprise/Business Working Capital/Business Start-up
Products Loan
Agricultural Loan Crop Farm Related
Livestock Dairy, Poultry
General Loan Consumption
New/Niche Educational Loan Academic/ Vocational
Products
Housing Loan Home Improvement/New Home
The very same clients that the sector currently serves have a plethora of alternate needs for basic
products and services, financial and non-financial which can affect sustainable, long-term
achievements in their quality of life. Fortunately, recognizing this pent-up demand, mature MFIs
are beginning to take concrete steps toward expanding their product basket, at least within the
context of financial services. Along with credit, MFIs are heavily exploring the possibility of
providing savings/deposit services, micro-insurance and remittance services
Who is Funding Microfinance?

8. Many developing and transition economies receive cross-border, international funding for
microfinance. This funding has been provided by a broad range of donors and investors with
diverse institutional characteristics, business models, instruments, return expectations, risk
appetites, and conceptions about the ultimate goal of microfinance. A myriad of new funders are
vying to contribute to microfinance: 30 microfinance investment vehicles (MIVs) have been
created just in the last two years for a total of 90 MIVs. Interest from foundations is also
expanding, with over 350 foundations funding microfinance, including 40 that have chosen
microfinance as a key program area. Development finance institutions (DFIs) such as KfW,
EBRD and IFC are stepping up their funding considerably-and are increasingly in demand given
the current financial crisis—and public bi-and multilateral agencies continue to play a significant
role.
Donors Investors
Bilateral Agencies
Development Finance Institutions (DFIs)
Aid agencies and ministries of governments in
The private sector arms of government-owned
developed countries [e.g., Swedish
bilateral and multilateral development agencies
International Development Agency (SIDA),
[e.g., KfW (Germany), International Finance
United States Agency for International
Corporation (IFC)]
Development (USAID)]
Multilateral Development Banks and UN Individual Investors
Agencies Socially motivated individual ―retail‖ investors
Agencies owned by multiple governments of and high net worth individuals that act as
the industrialized and developing world [e.g., venture philanthropists. Individual investors
World Bank, the regional development banks], provide their capital through organizations like
and UN agencies [e.g., the United Nations Oikocredit, a Dutch cooperative society,
Capital Development Fund (UNCDF), investment funds, and online, peer-to-peer
International Fund for Agricultural platforms like Kiva.org
Development (IFAD)]
Foundations Institutional Investors
Non-profit corporations or charitable trusts International retail banks, investment banks,
typically funded by a private individual, a pension funds, and private equity funds that
family or a corporation, with a principal channel capital into microfinance, often with
purpose of making grants to unrelated an expectation of return that is below market
organizations [e.g., Bill and Melinda Gates [e.g., Deutsche Bank, TIAA-CREF]
Foundation, Ford Foundation]
International NGOs Microfinance Investment Vehicles (MIVs)
Non governmental organizations that can be Investment entities that have microfinance as a
either specialized in microfinance [e.g., core investment objective and mandate. MIVs
ACCION, FINCA] or work in multiple sectors, receive money from investors through the
including microfinance [e.g., CARE, Concern issuance of shares, units, bonds, or other
Worldwide] financial instruments. They provide debt,
equity, or guarantees to MFIs and non-
specialized financial intermediaries. [e.g.,

9. European Fund for South East Europe (EFSE),
BlueOrchard]
Need of MFI:
The fundamental reason behind the Indian microfinance industry‘s impressive growth is that it is
fulfilling a critical need of its target audience, the low-income population, which has thus far
remained unaddressed by the traditional financial services sector. Currently, a total population of
1.1 billion is being served by 50,000 commercial banks, 12,000 co-operative bank offices,
15,000 regional rural banks and 100,000 primary agriculture societies. This density of financial
services, however, belies the availability of financial services to low-income households, which
make up a significant chunk of the Indian population. Before exploring why financial services
have failed to reach this segment of the population, it is necessary to first define their target The
Indian population can be divided into four categories based on household
income levels. The Rich who make up 0.4% of the households have an annual household income
greater than Rs.9,00,000. The Middle Class comprises 11 million households, or 5.9% of the
total households, and has an annual household income between Rs.1,80,000 and Rs.9,00,000.
The Aspirers make up nearly 22% of the households and have an annual household income
between Rs.81,000 and Rs.1,80,000. Lastly, the Deprived segment, the prime target of the
microfinance industry, comprises 135 million or 72% of the households and has an annual
household income below 81,000.
Despite the density and robustness of the formal Indian financial system, it has failed to reach the
Deprived segment, leaving approximately 135 million households entirely unbanked. The size of
India's unbanked population is one of the highest in the world, second only to that of China. The
microfinance sector targets the poorer portion of the Aspirer segment and the mid to richer
portion of the Deprived segment. The industry has thus far been able to create a service model
and products that are suitable to these segments and these services and products have proven
successful in affecting improvements in the clients‘ economic status.
The reasons behind the formal financial sector‘s failure to reach such a large segment of the
Indian population are manifold and operate in a self-reinforcing manner. The principal
prohibiting factor is that banks face extremely high fixed and variable costs in servicing low
income households, resulting in high delivery costs for relatively small transactions. Much of the
low income population is located in rural areas that are geographically remote and inaccessible.
For this population, the cost of visiting a traditional bank branch is prohibitive due to the loss of
wages that would be incurred in the time required. Concurrently, from a bank‘s perspective, the
cost of operating a branch in a remote location is financially unfeasible due to the low volume
and high cost dynamic. Moreover, low income households are not interested in the same
products that are usually utilized by the rest of the population because they have different
immediate needs, lower financial capacities and variable income streams. The unsuitability of
existing credit products for low income households is exacerbated by a general unavailability of
collateralizable assets. Additionally, the low income population is often illiterate and lacks

10. financial knowledge, making it nearly impossible for it to even contemplate availing existing
financial services, which provide no ancillary support to mitigate these challenges.
In the absence of access to formal financial services, the low income segment has traditionally
relied on local moneylenders to fulfill their financial needs. While this money is readily
available, it is often exorbitantly priced at 60%-100% annual yields and forces the borrower into
a classic debt trap, entrenching her in poverty. Credit from moneylenders has not traditionally
acted as a tool for business expansion or enhancement of quality of life, but rather as a lifeline
for immediate consumption or healthcare needs.
The Goal for MFIs should be:
• To improve the quality of life of the poor by providing access to financial and support services;
• To be a viable financial institution developing sustainable communities;
• To mobilize resources in order to provide financial and support services to the poor,
particularly women, for viable productive income generation enterprises enabling them to reduce
their poverty;
• Learn and evaluate what helps people to move out of poverty faster;
• To create opportunities for self-employment for the underprivileged;
• To train rural poor in simple skills and enable them to utilize the available resources and
contribute to employment and income generation in rural areas.
Indian Microfinance in the Global Context
It is critical to evaluate the progress of the Indian microfinance sector within the context of
global microfinance. With one of the highest growth rates globally since 2002, the Indian
microfinance sector has emerged as one of the most socially conscious, commercially viable, and
financially sustainable. According to a MIX market study, India has one of the lowest average
loan sizes of around Rs.6750 as well as the lowest yield on portfolio of 21.2%. The small loan
size combined with the low interest rates testify to the social inclination of Indian MFIs,
which seek to genuinely foster financial inclusion among the poor and alleviate poverty. In
conjunction with this goal, Indian MFIs have succeeded not only in comfortably covering costs,
but also returning healthy profits and Return on Assets (ROA). This highlights Indian MFIs‘
operational efficiency and ability to function on tight budgets. True, MFIs in other countries such
as Brazil and Mexico have higher profit margins, but they offer significantly larger loans with
interest rates typically between 40-65%. The inherent efficiency and resiliency of the Indian
microfinance industry proved critical during the recent financial meltdown during which growth
continued unabated despite a slowdown in the flow of funds which negatively affected growth in
microfinance in other markets around the world. This demonstrated self-sustainability is

11. prognostic of the long term viability and potential of the sector. Moreover, the Indian financial
system as a whole has demonstrated its long-term confidence in the industry through its own
investment choices. Whereas the global average of domestic investment in microfinance hovers
around 65%, over 90% of the funding in India comes through domestic channels, highlighting
confidence in the underlying business model and expectations of high future growth and returns.
REPORT:
OBJECTIVE OF STUDY:
To understand the basic practices in the field of Microfinance including the diverse approaches
used in for-profit and non-profit sectors. The study basically covers 2 things- explores various
models of Microfinance available and later examines the developmental aspect of microfinance
activity.
NEED OF STUDY:
The importance of microfinance for me lies in the fact that it provides a model of development.
It promotes entrepreneurship and gives people the means to fight poverty. Currently, the steadily
growing popularity of microfinance has reached a global audience. Also according to me is most
emerging model for fighting poverty in India. It has helped empowered women in India by
providing them source of employment. There are rapid changes in female/male relationship in
terms of increased freedom, autonomy and mobility.
There are various models of MFI. Most MFIs use groups as intermediaries for financial
transactions, but there are different ways of working with groups. In each of these models, the
group usually assumes joint liability for loans taken by its members, but there are significant
differences in the services offered and in the extent of client responsibility in financial
transactions. To study each of this model well and find there pros and cons.
In this sense the market for microfinance to a large extent is still untapped. There are very few
avenues for the poor to park their savings and get good returns.
Though microfinance has evolved a lot from its early version, there still exists a lot of scope for
customisation of microfinance instruments to suit specific needs of particular groups.
This opens a large array of opportunities for further growth in this sector.

12. METHODOLOGY-
PRIMARY DATA:
So one major challenge has been addressed by you
Questionnaire:
1) How is MicroFinance as a concept relevant for you?
2) Do you think interest rate charged by Microfinance Institution‘s (MFI‘s)
is appropriate?
Yes No
3) Which according to you is the most efficient MFI model, which has contributed the most
to Indian Rural Development? Why?
4) Which are the most important factors for rapid growth of Microfinance in India?
a. Low interest rate
b. Availability
c. Processing & sanctioning of loan
d. Method of Recovery
5) Do you think Microfinance has helped in Rural India?
Yes No
6) Do you think Microfinance is a tool to eradicate poverty?
Yes No
7) Microfinance Institutions can help unemployed urban youth?
8) Does women‘s role as clients for microfinance translate into empowerment for them? Or
is this merely a pragmatic means of ensuring repayments and group discipline?
9) How well do the products on offer reflect the needs/preference of poorer clients?
10) How do you anticipate the future of Microfinance?

13. SECONDARY DATA:
BUSINESS MODELS:
In India there is a diversity of approaches to microfinance, involving banks, government agencies,
NGOs. The focus of this study – is the specialized MFIs who provide financial services whilst
building their own financial sustainability.
1. Self Help Group Model (SHG)
2. Joint Liability Group Model (JLG)
3. Individual Lending Model (IL)
Self Help Groups are autonomous social bodies comprising of 10 to 20
Members. SHG generates a fund through its members or from a bank, and provides loans to its
members or others during needs based on the collective opinion of the group. The collateral here
is the borrower‘s societal status rather than physical property. Repayment of the loans is ensured
by the pressure exerted by the members of the group. SHG has a definite organizational structure
with the office bearers elected by the group members. Apart from the financial issues, the social
issues are also dealt by the group collectively.
Joint Liability Group is a model of combined responsibility. Members are formed into groups,
and the groups into a centre. Most favoured grouping is five members per group and 8 groups
per centre. It concentrates only on the financial matters and doesn‘t get involved in the social
issues. When a person in the group has defaulted in repaying the loan, the group should pay if it
has funds. Else, the centre has to pay from its funds. Frequent group meetings are held to avoid
the credit risks.
Individual lending is lending the money to individual persons from the MicroFinance
Institutions (MFIs). In this scenario, the person‘s ability to repay the loan is also verified.
Collateral or surety is also required for higher amounts of loans.
In the rapid growth of microfinance in India, what are the problems associated with it? First and
foremost issue is the lack of a regulatory framework. For a sector which shows tremendous
growth, a framework is required to regulate the policies. Lack of such regulatory body might
even lead to disaster like the subprime crisis. Currently National Bank for Agriculture and Rural
Development (NABARD) is preparing a regulation for MFIs. But the process is so slow and
takes years to get implemented. Such processes should be sped up.
The situation of Indian economy and society needs SHG to be the model of the MFIs, as SHG is
a much better model for a country like India where there are more people below poverty line.
But, in India JLG is the most prevalent model. This also isolates the social issues from the
financial issues. But in India, they mostly are similar issues occurring together. Integrating social
values and financing, as in SHG, helps a lot to Indian society. NABARD‘s SHG-Bank linkage
programme and RBI‘s advice to the banks to lend more to the SHG are some of the initiatives
directed towards this step.

14. The SHG Model
Structure of SHG
A SHG is a group of about 10 to 20 people, usually women, from a similar class and region,
who come together to form savings and credit organization. They pooled financial resources
to make small interest bearing loans to their members. This process creates an ethic that
focuses on savings first. The setting of terms and conditions and accounting of the loan are
done in the group by designated members.
SHG Federation
As mentioned previously, SHGs have also federated into larger organizations. In Figure 1, a
graphic illustration is shown of a SHG Federation. Typically, about 15 to 50 SHGs make up
a Cluster / VO with either one or two representatives from each SHG. Depending on
geography, several clusters or VOs come together to form an apex body or an SHG
Federation. In Andhra Pradesh, the Village Organizations, SHG Clusters and SHG
Federations are registered under the Mutually Aided Co-operative Society (MACS) Act 1995.
At the cluster and federation level, there are inter-group borrowings, exchange of ideas,
sharing of costs and discussion of common interests. There are typically various subcommittees
that deal with a variety of issues including loan collections, accounting and social
issues.
As already described, SHG Federations have presented some key benefits to SHGs as a result
of their greater scale. Increasingly, SHG Federations are being seen as a key interface with

15. the SHG movement because of their formal registration under the MACS and recognition
from bankers. But, in addition to the benefits of SHG Federations, there are some drawbacks,
or constraints, that should be noted.
An SHG Federation is a formal group of informal common-interest groups. As a result of its
rather informal members, there are internal constraints that it faces. Namely, it has a poor
capacity for self-governance, average to low quality managers and systems and process are
poorly defined. Further, there is significant financial cost to organizing and registering a
SHG Federation which has been estimated to be about Rs 7,000 per SHG member. To bridge
these internal constraints requires savvy external assistance and there are few good quality
NGOs to provide this assistance to a burgeoning number of SHG Federations.
SHG Bank Linkage
A most notable milestone in the SHG movement was when NABARD launched the pilot
phase of the SHG Bank Linkage programme in February 1992. This was the first instance of
mature SHGs that were directly financed by a commercial bank. The informal thrift and
credit groups of poor were recognised as bankable clients. Soon after, the RBI advised
commercial banks to consider lending to SHGs as part of their rural credit operations thus
creating SHG Bank Linkage.
The linking of SHGs with the financial sector was good for both sides. The banks were able
to tap into a large market, namely the low-income households, transactions costs were low
and repayment rates were high. The SHGs were able to scale up their operations with more
financing and they had access to more credit products.
Grameen Bank Model
The Grameen Bank is a microfinance organization and community development bank started
in Bangladesh that makes small loans (known as microcredit or "grameen credit") to the
impoverished without requiring collateral. The name Grameen is derived from the word gram
which means "rural" or "village" in the Bengali language.
Grameen Bank. In Bangladesh, Professor Muhammad Yunus addressed the banking problem
faced by the poor through a programme of action-research. With his graduate students in
Chittagong University in 1976, he designed an experimental credit programme to serve them. It
spread rapidly to hundreds of villages. Through a special relationship with rural banks, he
disbursed and recovered thousands of loans, but the bankers refused to take over the project at
the end of the pilot phase. They feared it was too expensive and risky in spite of his success.
Eventually, through the support of donors, the Grameen Bank was founded in 1983 and now

16. serves more than 4 million borrowers. The initial success of Grameen Bank also stimulated the
establishment of several other giant microfinance institutions like BRAC, ASA, Proshika, etc.
Through the 1980s, the policy of targeted, subsidized rural credit came under a slow but
increasing attack as evidence mounted of the disappointing performance of directed credit
programs, especially poor loan recovery, high administrative costs, agricultural development
bank insolvency, and accrual of a disproportionate share of the benefits of subsidized credit to
larger farmers. The basic tenets underlying the traditional directed credit approach were
debunked and supplanted by a new school of thought called the "financial systems approach",
which viewed credit not as a productive input necessary for agricultural development but as just
one type of financial service that should be freely priced to guarantee its permanent supply and
eliminate rationing. The financial systems school held that the emphasis on interest rate ceilings
and credit subsidies retarded the development of financial intermediaries, discouraged
intermediation between savers and investors, and benefited larger scale producers more than
small scale, low-income producers.
Meanwhile, microcredit programs throughout the world improved upon the original
methodologies and defied conventional wisdom about financing the poor. First, they showed that
poor people, especially women, had excellent repayment rates among the better programs, rates
that were better than the formal financial sectors of most developing countries. Second, the poor
were willing and able to pay interest rates that allowed microfinance institutions (MFIs) to cover
their costs.
1990s These two features - high repayment and cost-recovery interest rates - permitted some
MFIs to achieve long-term sustainability and reach large numbers of clients.
Another flagship of the microfinance movement is the village banking unit system of the Bank
Rakyat Indonesia (BRI), the largest microfinance institution in developing countries. This state-
owned bank serves about 22 million microsavers with autonomously managed microbanks. The
microbanks of BRI are the product of a successful transformation by the state of a state-owned
agricultural bank during the mid-1980s.
The 1990s saw growing enthusiasm for promoting microfinance as a strategy for poverty
alleviation. The microfinance sector blossomed in many countries, leading to multiple financial
services firms serving the needs of microentrepreneurs and poor households. These gains,
however, tended to concentrate in urban and densely populated rural areas.
It was not until the mid-1990s that the term "microcredit" began to be replaced by a new term
that included not only credit, but also savings and other financial services. "Microfinance"
emerged as the term of choice to refer to a range of financial services to the poor, that included
not only credit, but also savings and other services such as insurance and money transfers.
ACCION helped found BancoSol in 1992, the first commercial bank in the world dedicated
solely to microfinance. Today, BancoSol offers its more than 70,000 clients an impressive range
of financial services including savings accounts, credit cards and housing loans - products that
just five years ago were only accessible to Bolivia's upper classes. BancoSol is no longer unique:
more than 15 ACCION-affiliated organizations are now regulated financial institutions.

17. Today, practitioners and donors are increasingly focusing on expanded financial services to the
poor in frontier markets and on the integration of microfinance in financial systems
development. The recent introduction by some donors of the financial systems approach in
microfinance - which emphasizes favorable policy environment and institution-building - has
improved the overall effectiveness of microfinance interventions. But numerous challenges
remain, especially in rural and agricultural finance and other frontier markets. Today, the
microfinance industry and the greater development community share the view that permanent
poverty reduction requires addressing the multiple dimensions of poverty. For the international
community, this means reaching specific Millennium Development Goals (MDGs) in education,
women's empowerment, and health, among others. For microfinance, this means viewing
microfinance as an essential element in any country's financial system.
Village Phone Program
Among many different applications of microcredit by the bank, one is the Village Phone
program, through which women entrepreneurs can start a business providing wireless
payphone service in rural areas of Bangladesh. This program earned the bank the 2004
Petersburg Prize worth of EUR 100,000/-, for its contribution of Technology to Development. In
the press release announcing the prize, the Development Gateway Foundation noted that through
this program:
Grameen has created a new class of women entrepreneurs who have raised themselves from
poverty. Moreover, it has improved the livelihoods of farmers and others who are provided
access to critical market information and lifeline communications previously unattainable in
some 28,000 villages of Bangladesh. More than 55,000 phones are currently in operation, with
more than 80 million people benefiting from access to market information, news from relatives,
and more.
Struggling members program
In 2003, Grameen Bank started a new program, different from its traditional group-based
lending, exclusively targeted to the beggars in Bangladesh. This program is focused on
distributing small loans to beggars. The existing rules of banking are not applied, the loans are
completely interest-free, the repayment period can be arbitrarily long, for example, a beggar
taking a small loan of around 100 taka (about US $1.50) can pay only 2.00 taka (about 3.4 US
cents) per week and furthermore the borrower is covered under life insurance free of cost.
CASE STUDY ON:
1) SKS Finance:
Introduction-

18. SKS Microfinance Limited" (SKS) is a non-banking finance company (NBFC), regulated by the
Reserve Bank of India. SKS claims its mission is to eradicate poverty by providing financial
services to the poor. The company operates across these 19 states of India: Andhra Pradesh,
Karnataka, Maharashtra, Orissa, Madhya Pradesh, Bihar, Uttar Pradesh, Rajasthan, Uttaranchal,
Himachal Pradesh, Haryana, West Bengal, Jharkhand, Chhattisgarh, Gujarat, Kerala, Tamil
Nadu, Punjab and Delhi.
SKS has become India‘s largest and one of the world‘s fastest
growing microfinance organizations. Founded in 1997 by the now chairperson Vikram Akula,
SKS as of December 31 2010, has 7.7 million clients (2010) in 2,403 branches in the 19 states
across India . The company charges an interest rate of 24.55%, per annum across India, a
relatively low amount for microfinance interest, and hold a 99% repay rate.‖
SKS's hopes "to serve 50 million households across India and other parts of the world and also to
create a commercial microfinance model that delivers high value to our customers". Which is
along the lines of micro finance goals of eradicating poverty.
SKS practices a standardised processes of delivering and recovering loans, which enables them
to reach out to the most customers cost effectively. They are able to expand the business to reach
further villages by charging a small interest rate, one that clients are willing to pay in order to
avoid starvation, poor money management, or government loan sharks.
The Case-
ALITTLE more than 18 months later, SKS went on to become one of the most storied initial
public offerings (IPOs) in recent history. The stock listed in August 2010 at Rs 1,036 (offer price
was Rs 985); the roughly Rs 1,600-crore issue was oversubscribed more than 20 times.
But just a few months later, in October 2010, the company was hit by a series of setbacks;
murmurs about suicides of microfinance borrowers in rural Andhra Pradesh began to make
headlines in the local press, and SKS featured prominently in them, along with other companies.
Then, there was the unceremonious sacking of CEO Suresh Gurumani —Vikram Akula had
earlier become non-executive chairman — that raised a number of eyebrows.
In October 2010, the Andhra Pradesh government issued the Andhra Pradesh Microfinance
Ordinance — which was passed as an Act by the Legislative Assembly in December 2010 —
that severely hampered the company‘s operations in the motherland of microfinance by putting
several restrictions and conditions on the conduct of business.
SKS is not only India‘s most high-profile microfinance institution, but in public perception, it is
also the leader and the proxy for the microfinance industry in India — at least the avatar of
microfinance that we have currently. It has a charismatic leader who has been featured in Time

19. magazine; the firm was expected to change the nature of how the poor are financed.
Some of the biggest and most professional investors have put money into it. The controversies
and the decline of SKS is a cautionary tale of how a great dream is on the verge of crumbling
which brings us to the present.
Bad Portents
In May 2011, a report by equity analysts at JP Morgan Asia Pacific Equity Research downgraded
a stock that was already under pressure and reduced its value to half the listing price ahead of
SKS‘s fourth quarter financial results. The report argued that most of the AP loans — the AP
book, that is — was seriously impaired and that the company would have to take losses (the
state‘s ordinance said collections could be made monthly but not weekly, restricting the flow of
the business‘s lifeblood).
A similar report from Credit Suisse suggested that the performance in the fourth quarter — and
the losses — could stretch through 2011-12 (FY12). Other analysts went as far as to say it could
go into FY13.
Some say that a large part of the SKS story remains untold. ―The latest developments are an
unfortunate confluence of circumstances, but perhaps inevitable,‖ says the head of a leading
investment banking firm. ―Reconciling the rhetoric of poverty alleviation through microfinance
with the commercial success and a few people getting very rich is going to be a mammoth task.‖
The speed at which the SKS success story unravelled has raised several questions. First, was
Akula‘s revolving door entry and exit as chief executive sensible? Second, does his leadership
style — some people called it ―arrogant‖ — cause more harm than good? Third, will the Andhra
Pradesh Microfinance Institutions (Regulation of Moneylending) Act 2010 strike a body blow
that the company will take time to recover from? Fourth, what will the future be like for SKS
Microfinance?

20. Secondary Data: Status of MFI in India-
Progress under Microfinance – Highlights 2010:
Total MFIs: 1933
Gross loan portfolio: 64.9 billion US dollars
Deposits: 27.0 billion US dollars
Number of borrowers: 91.2 million
Average loan balance per borrower: 534.5 US dollars
Sl. No. Range ( Loan size) Number of loan Amount of loan Rs. Average
accounts loan
amount
Rs.
1 Rs. 0 to Rs.500 46,687 (37.3%) 1,72,52,074 ( 9.7 %) 370
2 Rs. 500-Rs. 1000 37,125 (29.7%) 3,48,79,579 (19.5 %) 940
3 Rs.1000 to Rs. 3,0382 (24.3 %) 6,16,59,704 ( 34.5%) 2,029
3000
4 Rs. 3000 to Rs. 7591 (6.1 %) 3,39,40,225 ( 19.0%) 4,471
5000
5 Rs. 5000 to Rs. 1326 (1.1 %) 82,59,600 (4.6 %) 6,229
7000
6 Rs. 7000 to Rs. 1329 (1.1 %) 1,23,93,264 (6.9 %) 9,325
10000
7 Rs. 10,000 to Rs. 366 (0.3%) 48,61,456 (2.7 %) 13,283
15,000
8 Rs. 15,000 and 229 (0.2 %) 54,74,722 (3.1 %) 23,907
above
Total 1,25,035 (100%) 17,87,20,624 (100%) 1,429

21. It can be seen that the size of loan accounts was very small as nearly about 91 % loan accounts
were in the size class below Rs. 3000.( 60 US$). Even in the case of amount of loan taken,
nearly 64 % of the loans were below Rs. 3000 indicating preponderance of small loans. Catering
to such ‗small‘ demand has been virtually impossible for the formal banking system in the past,
mainly due to the high transaction and process costs involved.
Utilization of borrowed funds:
Purpose % share in number of loan % Share in loan amount
accounts
Consumption 35.27 28.99
Agricultural loans 53.37 57.41
Off-farm enterprises 7.98 10.95
Loans for education 3.38 2.65
100 100
The data show that agricultural loans (crop cultivation expenses) was the most important purpose
having a share of about 53 % in the loan accounts and 57 % share in the loan amount. This was
followed by consumption loans which accounted for about 35 % in the loan accounts and about
29% in the loan amount. Evidence of some diversification in terms of borrowing for enterprises
for non agricultural purposes is also available. The purpose wise borrowing pattern for the BPL
and Non BPL members remained more or less the same, indicating that such economic
segregation between the two categories is only illusory. In real life situations, money is fungible.
Borrowing from the SHGs therefore, had given the borrowers the required flexibility to manage
their consumption and working capital needs simultaneously.
source: http://www.nabard.org
Different Models of Microfinance- In this section, the data for the year 2009-10 alongwith a few
preceding years have been presented and reviewed under two models of microfinance involving
credit linkage with banks :
(i) SHG - Bank Linkage Model : This model involves the SHGs financed directly by
the banks viz., CBs (Public Sector and Private Sector), RRBs and Cooperative Banks.

22. (ii) MFI - Bank Linkage Model : This model covers financing of Micro Finance
Institutions (MFIs) by banking agencies for on-lending to SHGs and other small
borrowers.
In addition, to the SHG-Bank linkage model and MFI-Bank linkage model, Small Industries
Development Bank of India (SIDBI) has also supported MFIs. The details for the year 2009-10
are presented below:

23. Micro Finance India Summit 2010: The State of the Sector 2010 indicates abated growth
compared to previous years. The sector grew at 18% in 2009- 10. But this growth came
by focusing on outreach rather than the deepening of service offerings and this needs to
be corrected.
2008-09 2009-10 Growth
%
No of borrowing members - 54 62.4 16
SHGs -mn
No of MFI customers - mn 22.6 26.7 18
Outstanding Bank loans to 222 280 26
SHGs Rs bn
Outstanding MFI loans to 117 183 * 36
customers Rs bn
* Does not include portfolio managed on behalf of other institutions Rs 42 bn
• Total microfinance clients exceed 100 mn
• MF outstanding as % of bank credit 1.4
• Total bank loans to MFIs – Rs 14 bn
• Average per capita MFI loan – Rs 6060
• Average per capita SHG loan – Rs 4450
• Equity inflow through PE/VC – $ 209 mn
Andhra Tamil Karnataka West Orissa
Pradesh Nadu Bengal
Number of poor 2.52 2.91 2.77 4.16 3.56
families

24. No of microfinance
clients (SHG+MFI) 25.36 11.59 7.64 10.14 6.4
MFI clients to poor
households ratio 10.1 4.0 2.8 2.4 1.8
MFI clients to total
households ratio 1.6 0.9 0.7 0.6 0.8
Total MF loans o/s
(SHG+MFI) 169.49 64.46 46.06 34.34 27.16
Average loans per
poor household 67258 22151 16628 8255 7629
2) M-CRIL India Indices of Microfinance 2010, the growth of the largest Indian MFIs in
2009-10 continued to be stronger than is desirable. Growth in 2009-10 was 43% for
borrowers and 76% for portfolio, only slightly reduced from the 53% average for the
previous two years after adjusting for multiple lending. CRILEX which is the M-CRIL
India MFI Growth Index has also reached 14, 799 mark in March 2010.
The largest 24 institutions together serviced a portfolio of Rs 18,400 crore ($4 billion) through
about 17 million clients (estimated after allowing for multiple lending) and while the Top5 MFIs
continued to grow strongly the Next10 made up for last year‘s slowdown, and the Following 9
also gathered pace.
The portfolio growth for top 5 MFIs stood at around 110%, slightly less than the portfolio
growth of Following 9 which was 120%. The Next 10 MFIs have however reported an 80%
growth in their numbers of borrowers which is the highest among the largest MFIs in India.

25. As might be expected, loan portfolios are growing more strongly than numbers of borrowers but
the extent of multiple borrowing is nevertheless increasing with a conservative 40% estimate (by
M-CRIL) of the extent of multiple borrowing.
The index shows that while in the past it was the largest MFIs that created competitive pressures
and grew aggressively now MFIs of all sizes have joined the race.
2009:
India‘s Microfinance institutions reached 76.6 million against last year‘s 59 million, according to
the ―State of the Sector Report‖
Compiled by N. Srinivasan, the report was released as part of the annual Microfinance India
Summit 2009
Some quick highlights of the report are:
* MFI‘s have recorded about 8.5 million clients during the year 2008-09, a growth of 60% over
the previous year.
* More than 50 percent of low income households are covered by some form of microfinance
product
* The total outstanding microfinance loans posted a growth rate of 30% or 359.39 billion over
the last year‘s level of Rs 229.54 billion.
* The overall coverage of the sector is estimated to have reached 76.6 million against 59 Million
last year.
* The SHG loan outstanding has increased by Rs. 71.5 billion with an addition of 6.9 million
clients.
* At the current growth rates, MFIs might outstrip the SBLP in portfolio volumes soon.
* Some parts in Karnataka faced entrenched default constituting a portfolio share of less than
0.5%.
* MFIs so far reached 234 of the 331 poorest districts identified by the government.
* SBLP regstered a decline of number of women SHGs from 82.5% in March 2007 to 80.4% in
March 2008.
* The microfinance penetration index shows especially in Bihar, Madhya Pradesh, Rajasthan and

26. Uttar Pradesh compared to extraordinary levels reached in Andhra Pradesh, Karnataka and Tamil
Nadu.
While last year‘s report focused on the increased risk in the sector, this years‘ report takes stock
of the uninterrupted growth rate of the sector despite several internal and external adversities.
The 50 Top Microfinance Institutions: source- http://www.forbes.com
RANK NAME COUNTRY SCALE EFFICIENCY RISK RETURNS
1 ASA Bangladesh 14 83 56 40
2 Bandhan (Society and NBFC) India 108 49 42 1
3 Banco do Nordeste Brazil 46 27 213 25
4 Fundación Mundial de la Mujer Colombia 58 72 193 1
Bucaramanga
5 FONDEP Micro-Crédit Morocco 119 26 196 1
6 Amhara Credit and Savings Institution Ethiopia 56 126 118 42
7 Banco Compartamos, S.A., Institución de Mexico 15 24 295 11
Banca Múltiple
8 Association Al Amana for the Promotion Morocco 17 212 133 1
of Micro-Enterprises Morocco
9 Fundación Mundo Mujer Popayán Colombia 53 181 141 1
10 Fundación WWB Colombia - Cali Colombia 27 206 155 4
11 Consumer Credit Union 'Economic Russia 82 300 19 1
Partnership'
12 Fondation Banque Populaire pour le Morocco 59 126 219 1
Micro-Credit
13 Microcredit Foundation of India India 75 142 7 185
14 EKI Bosnia and 66 102 242 1
Herzegovina

27. 15 Saadhana Microfin Society India 263 79 73 1
16 Jagorani Chakra Foundation Bangladesh 136 176 128 1
17 Grameen Bank Bangladesh 8 280 100 62
18 Partner Bosnia and 64 169 230 1
Herzegovina
19 Grameen Koota India 209 106 156 1
20 Caja Municipal de Ahorro y Crédito de Peru 48 99 222 119
Cusco
21 Bangladesh Rural Advancement Bangladesh 10 159 126 205
Committee
22 AgroInvest Serbia 84 195 222 1
23 Caja Municipal de Ahorro y Crédito de Peru 20 163 220 101
Trujillo
23 Sharada's Women's Association for India 229 207 55 13
Weaker Section
24 MIKROFIN Banja Luka Bosnia and 60 240 205 1
Herzegovina
25 Khan Bank (Agricultural Bank of Mongolia 19 149 280 59
Mongolia LLP)
26 INECO Bank Armenia 96 173 202 39
27 Fondation Zakoura Morocco 51 268 194 1
28 Dakahlya Businessmen's Association for Egypt 200 215 102 1
Community Development
29 Asmitha Microfin Ltd. India 80 254 73 111
30 Credi Fe Desarrollo Microempresarial Ecuador 28 252 206 34
S.A.
31 Dedebit Credit and Savings Institution Ethiopia 50 246 80 154
32 MI-BOSPO Tuzla Bosnia and 128 120 283 1
Herzegovina
33 Fundacion Para La Promocion y el Nicaragua 173 89 171 100
Desarrollo

28. 34 Kashf Foundation Pakistan 123 194 219 1
35 Shakti Foundation for Disadvantaged Bangladesh 170 221 151 1
Women
36 enda inter-arabe Tunisia 198 90 257 1
37 Kazakhstan Loan Fund Kazakhstan 120 118 320 1
38 Integrated Development Foundation Bangladesh 300 134 140 1
39 Microcredit Organization Sunrise Bosnia and 114 103 341 17
Herzegovina
40 FINCA – ECU Ecuador 125 138 264 54
41 Caja Municipal de Ahorro y Crédito de Peru 23 126 220 215
Arequipa
42 Crédito con Educación Rural Bolivia 135 152 298 1
43 BESA Fund Albania 109 135 345 1
44 SKS Microfinance Private Limited India 61 395 141 1
45 Development and Employment Fund Jordan 83 388 135 1
46 Programas para la Mujer - Peru Peru 292 82 242 1
47 Kreditimi Rural i Kosoves LLC (formerly Kosovo 213 158 247 1
Rural Finance Project of Kosovo)
48 BURO, formerly BURO Tangail Bangladesh 137 207 186 91
49 Opportunity Bank A.D. Podgorica Serbia 49 234 319 23
50 Sanasa Development Bank Sri Lanka 86 206 93 241
Top 10 Biggest mFIs in India
1 SHARE
2 Spandana
3 SKS
4 SKDRDP
5 MFI
6 AML
7 BASIX
8 Bandhana
9 Cashpor MC

29. 10 GV
List of Micro Finance Companies:
1. Basix
2. Spandana
3. SKS micro finance
4. Share Micro Finance
5. Birla Global Finance
6. Sriram Transport and Finance
7. India bulls Credit services
8. Cholamanadlam-Group
9. GE Money
10. Reliance Money
11. M & M finance
12. Sundaram Finance
13. Anagram Finance
14. VLS Finance
15. IDFC
16. BLB
17. India bulls financial services
18. Ratnabali Capital services
19. ACCESS Development Service
20. UTI
21. ING Vyasa
22. Met Life
23. ICICI bank

30. 24. HDFC Bank
25. ING Vysya Life insurance
26. IDBI
27. Standard Chartered
28. Future Money
29. Equinox
30. GE Money
31. IFC