Microfinance

its

Opportunities and Limitations

Agenda

Scenario of Micro Finance in India.

Micro-Credits model.
Business model of Grameen Bank
Self Help Groups (SHGs).
Difference between JLGs and SHGs
NABARD initiatives in Micro finance.
Business Model of SAKHI.
Credit institutions as a Political tool: Debt relief in India.
MFIs being criticized because of high interest rates.
SWOT Analysis of Micro Finance
Interview of End Users
Future of Micro Finance
Learning from the Project
Conclusion.
Learning from the Company
References.

Scenario of Micro Finance in India

Indias population is more than 1000 million, around 350 million,
are living below the poverty.
Only 20% access loan from the formal sources and 80% from the
informal sources.
Out of that 20% only 10% have access to Micro finance.
Annual credit demand by the poor is estimated to be about Rs
60,000 crores. And only 12,000 crores are disbursed. (April 09)
Customers of Micro Finance are Small and marginal farmers", "
rural artisans" and "economically weaker sections

Micro-Credits model
Focus on, providing the capital for poor women to use their innate
"survival skills" to pull themselves out of poverty.
Lend mostly to women in small groups (credit circles), say of five or
seven.
Draw up a weekly or bi-weekly repayment schedule.
In case any member defaults the entire circle is denied access to credit

Business model of GRAMEEN bank

Introduction

The Grameen Bank started in 1976 by the Nobel Laureate, Professor

Muhammad Yunus in Bangladesh .
Grameen today has some 2,468 branches in Bangladesh, with a staff of
24,703 people serving 7.34 million borrowers from 80,257 villages.
Grameens methods are applied in 58 countries including the United
States.
Grameen Bank borrowers own 94% of the Bank. The remaining 6% are
owned by the government. (January 09)

Working model of Grameen bank:

Manager first makes a round to the appointed area to introduce Grameen

policies and programs.
Try to make the group of 5 people.

Conti.

Only two members can obtain loan at first. After 6 weeks of successful
repayment another two can apply for loan. The leader can only receive loan
at last.
Repayment responsibility solely rests on the individual borrower.
However if one member of a group defaults, that group will never receive a
loan from Grameen

Two popular scheme by Grameen Bank is:

Loan Insurance:Beggars Loan:-

16
1. WeDecisions
shall follow and advance the four principles of Grameen Bank: Discipline, Unity,
Courage and Hard work in all walks of our lives.

2. Prosperity we shall bring to our families.

3. We shall not live in dilapidated houses. We shall repair our houses and work towards
constructing new houses at the earliest.
4. We shall grow vegetables all the year round. We shall eat plenty of them and sell the
surplus.
5. During the plantation seasons, we shall plant as many seedlings as possible.
6. We shall plan to keep our families small. We shall minimize our expenditures. We shall
look after our health.
7. We shall educate our children and ensure that they can earn to pay for their education.
8. We shall always keep our children and the environment clean.
9. We shall build and use pit-latrines.
10. We shall drink water from tube wells. If it is not available, we shall boil water or use
alum.
11. We shall not take any dowry at our sons' weddings; neither shall we give any dowry at
our daughter's wedding. We shall keep our centre free from the curse of dowry. We shall not
practice child marriage.
12. We shall not inflict any injustice on anyone; neither shall we allow anyone to do so.
13. We shall collectively undertake bigger investments for higher incomes.
14. We shall always be ready to help each other. If anyone is in difficulty, we shall all help
him or her.
15. If we come to know of any breach of discipline in any centre, we shall all go there and
help restore discipline.
16. We shall take part in all social activities collectively .
Sources: www.Grameen-info.org

Conti.
The Repayment Mechanism:

One year loan .

Equal weekly installments .
Repayment starts one week after the loan .
Repayment amounts to 2% per week for fifty weeks .

Criticism of Grameen Bank:

There are rumors that there repayment rate are fake.

Grameen Bank clients used their loans for many different purpose .e.g..Dowry,
gambling etc.

The Self Help Group (SGH)

SHGs is a small group of rural poor, who have voluntarily come
forward to form a group for improvement of the social and economic
status of the members.
Homogeneous group of about 15 to 20.
Every member to save small amounts regularly.
Every member learns prioritization and financial discipline.
Condition required for membership for SHGs

Members should be between the age group of 21-60 years.

From one family, only one person can become a member of an SHG.
(More families can join SHGs this way).
The group normally consists of either only men or only women.
Members should be homogenous i.e. should have the same social and
financial background.
Members should be rural poor.

How SHG works ( practical example)

Difference between JLGs and SHGs

Joint Liability Group (JLG) is a group of individuals coming together to
borrow from the financial institution.
SHGs (Self Help Groups)

JLGs (Joint Liability Groups)

Minimum 15 members and

maximum 20.

Minimum 3 members and

maximum 5.

Meeting is compulsory.

No necessary of compulsory
meeting.

Bank loan is available.

They get loans only from MFIs.

Gets the benefit of government

scheme.

There is no benefit.

Individual responsibility.

They share responsibility and stand

as guarantee for each other.

Sources :Survey on SAKHI

NABARD initiatives in Micro finance

National Bank for Agriculture and Rural Development (NABARD)
was established as an apex rural development bank in the year 1982,
through an Act of Parliament.
Role and Function of NABARD:

Providing Refinance to lending institutions in rural areas.

Evaluating, monitoring and inspecting the client banks.
Providing support to NGOs through a variety of schemes.
Making model projects / development schemes for banks and farmers
It prepares, on annual basis, rural credit plans for all districts in the
country.

Organizational structure
Board of Director
Chairman

Managing Director

Executive Director(4)

Head Office
Dept (24)
Sub Office(Andaman &
Nicobar) & Special cell
(Srinagar)

Regional Offices(28)

Training Establishment(6)

District Development
Offices (391)

 Financial Santa Clause (NABARD)

(NABARD) was established in 1982,with an initial capital of 1400 crores.

And till March 30, 09 it reached to Rs 1, 00,000 crores with the surplus of Rs
1400 crores.
Its Reserve and Surplus increased by 10.26% from 07 to 08, and its Cash and
Bank balance and Investment increased by 40.16% and 15.5%. (sources :nabard.org)

From where NABARD gets the fund?

How NABARD gives loan to the Institutions?

NABARD follows the very strange way of providing the loans.

They give loans to the every ODD number institution i.e.3, 5, 7, 9.

How NABARD manage their repayment

structure?
Their Repayment ratio is more than 95%.
NABARD see the credit rating of that institute given by the rating
agency.
NABARD analyze the balance sheet and profit and loss statement of
the borrowing institutes.
NABARD sees the past record of the borrowing institutes, their
repayment ratio and the executives who are working in that institutes.

Business model of SAKHI

Introduction

SAKHI (An Organization for Women) , established in the year 2002.

Started by veteran Mrs. Alpa Chauhan.
SAKHI is having three office .(1 ) Dakoor (2 ) Umreth (3) Dahood.

Role and function of SAKHI

Provide loan to the economic disadvantage people.

Help them in creating groups.
Provide them Micro plus loans.
Help them in establishing their(borrowers) business.

Organization Structure
SAKHI had developed a systematic organizational structure for itself.
Board of Trustees
CEO

HR Mgr

Operation
Mgr

Finance Mgr

Area Mgr

Audit Mgr

Audit Team

Brach Mgr
FCOs

Brach Structure
Brach Manager

A/C MIS
Officer

FCO-JLG

FCO

FCO-GRLN

Admin Mgr

How SAKHI disburse the Loans?

Loan Size:
Cycle I

Rs 3000-Rs 5000

Cycle II

Upto Rs 8000

Cycle-III

Upto Rs 12,000

Cycle- IV

Upto Rs 15,000

Duration in months

12

Minimum Loan size

Rs 3000

Maximum Loan size

Rs 15,000

Repayment Frequency

Monthly

Rate of interest (P.a)

18%

Upfront loan proceeding

fees

2%

Security

Group guarantee followed by

centre guarantee

Sources: Survey on SAKHI

How SAKHI raise capital?

Friends of Women World Bank.(FWWB) (13.5% p.a ).
Indian Bank(13.75% p.a).

Why SAKHI charges such a high rate of interest (18% p.a)?

The loan doesnt disburse immediately.

SAKHI charges same rate, even if above hike there rates.
High transaction and operating cost.

Is government waiver plan effected there Institution?

That rule was only for government institution.

But borrowers also requested them to waive their loan amount.

Practical example of interest calculation.

Debt Relief in India

Political intervention creates serious threat for MFIs.
Easy and Safest way to attract the voters.
Borrowers creates a negative mind set.
The waiver of farm loans , increased defaulters.
Many decent borrowers has effected by this waive of schemes.
Legacy continue, Rs 60,000 crore was declared by Shri P.Chitambaram.

MFIs being criticized because of high

interest rates:
Most MFIs financially sustainable by charging interest rates that are
high enough to cover all their costs.
Four key factors determine these rates:

The cost of funds.

The MFI's operating expenses.
Loan losses.
And profits needed to expand their capital base and fund expected future
growth.

There are three kinds of costs the MFI has to cover when it makes
microloans:

The cost of the money that it lends.

The cost of loan defaults.
Transaction and Operating cost.

Practical Example of rate calculation

Conti.
For instance, MFI lends is 10 percent, and it experiences defaults of 1
percent of the amount lent, then total Rs 11 for a loan of Rs 100, and
Rs 55 for a loan of Rs 500. And the third cost i.e. transaction cost.
:Example
Suppose that the transaction cost is Rs 15 per loan and that the loans
are for one year. To break even on the Rs 500 loan, the MFI would
need to collect interest of Rs 50 + Rs 5 + Rs 15 = Rs 70, which
represents an annual interest rate of 13 percent. To break even on the
Rs 100 loan, the MFI would need to collect interest of Rs 10 +Rs 1 +
Rs 15 = Rs 26, which is an interest rate of 26 percent.

Rate Ceilings: Not the Answer

There is hue and cry on the high rate of interest which is being
charged by many MFIs.
Policymaker concern over high interest rates.
What are the reasons why rate ceiling can create disaster?

Rate ceiling will diminishing the return of MFIs.

If rates are set to a level less than that required to cover costs, it will lead
to losses and also reduce their creditworthiness and ability to borrow.
Compelled rate ceiling would increase more poverty in the economy.

SWOT Analysis of micro finance

Strength

Helped in reducing the poverty.

Huge networking available.

Weakness

Not properly regulated.

High number of people access to informal sources of finance.
Concentrating on few people only and mainly in urban areas.

Opportunity

Huge demand and supply gap.

Employment Opportunity.
Huge Untapped Market.
Opportunity for Pvt. Banks, NBFCs, Foreign Banks to enter this business
segment.

Threat

High Competition.
Neophyte Industry.
Over involvement of Govt.

Interview of End Users

Are you a regular or new customer?
If you are a Regular customer, then can you please tell me
your experience?
Whats your opinion on interest rates?
What you do with that loan amount?
Does the Microfinance Institutions provide you any type of other
benefits other than just loan Amount?
According to you which is better, loan from local Zamidars or from
MFIs?
Have you ever faced any violation on you, if you were not
able to repay the loan amount?

Future of Micro Finance

Estimated that in next five years, 65% of the poor people will have excess
to MFIs.
Many Pvt. Banks and Foreign Banks would enter this business segment,
because of very low NPAs.
Estimated that 5 % of the number of people below the poverty line will get
reduced in the next 5 years.(World Bank report)

Learning from the project

I learnt in detail the process of Micro Finance, from its need at the grass
root level.
Functioning of various Govt, Semi Govt, & various other delivery
channels.
Practical learning of how SHGs are formed.
Practical learning of how the MFIs works.
Most important learning, how it can change the life of the Economic
disadvantaged people.

Conclusion

Dont wait, the time will never be just right. Start where you stand and
work with whatever tools you may have at your commands and the
better tolls will be found as you go along.

William Surds

Learning from THE Company

Practical learning of Equity, Future & Options market by terminal
trading.
Various strategies of Market.
Apart from Micro Finance, Nine mine projects, which helped to relate
to the Present Market conditions.
And the most important thing I learnt from this institution is
Patience

Thank you

References
Mr. Sanjiv Rohilla
Mr. Arvind Parmar
Asst. General Manager
Operation Manager
NABARD
SAKHI
Anand.
Umreth
Ph No. 9427109121
Ph No. 9925153226
Websites:
www.ifmr.ac.in
Mr. Mukesh Gandhi
www.google.com
Director
www.microfinanceinsight.com
MAS Finance
www.investopedia.com
Ahemedabad
www.books.google.com
Ph No.9825009793
www.seepnetwork.org
www.forbes.com
www.nationmaster.com
www.thaindian.com
www.authorstream.com
www.knowledge.allianz.com
www.familiesinbusiness.net
www.indiamicrofinance.com
www.gdrc.org Research paper by Prabhu Ghate
Research paper by Vishal Sehgal
Presentation by N. Srinivasan