SYNOPSIS

TOPIC: Determinants of Success factors in Microfinance Industry in India

MI CROFI NANCE - AN OVERVI EW
This industry report presents a detailed overview of the microfinance industry in
India. The advent of new millennium witnessed significant developments in the
Indian microfinance industry, which attracted the attention of several private sector
andforeign banks.

The report analyzes the potential of Indian microfinance industry and examines the
recent polices of Indian government to boost the growth of the industry. It
describes various microfinance models popular in India and includes a note on the
leading players in the Indian microfinance industry.
Microfinance in India is approaching a historic 'tipping point' that could lead to a
massive poverty reduction in the next five to ten years.

I NDI AN MI CROFI NANCE CONTEXT
Indian public policy for rural finance from 1950s to till date mirrors the patterns
observed worldwide. Increasing access to credit for the poor has always remained
at the core of Indian planning in fight against poverty. The assumption behind
expanding outreach of financial services, mainly credit was that the welfare costs
of exclusion from the banking sector, especially for rural poor are very high.
Starting late 1960s, India was home to one of largest state intervention in rural
credit market and has been euphemistically referred to as Social banking' phase. It
saw nationalization of existing private commercial banks, massive expansion of
branch network in rural areas, mandatory directed credit to priority sectors of the
economy, subsidized rates of interest and creation of a new set of rural banks at
district level and an Apex bank for Agriculture and Rural Development
(NABARD) at national level. These measures resulted in impressive gains in rural
outreach and volume of credit. As a result, between 1961 and 2000 the average
population per bank branch fell tenfold from about 140 thousand to 14000
(Burgess & Pande, 2005) and the share of institutional agencies in rural credit
increased from 7.3% 1951 to 66% in 1991.

REVI EW OF LI TERATURE
Develtere, P. and A. Huybrechts (2005).
"The impact of microcredit on the poor in Bangladesh." Alternatives 30(2): 165-
189.
Abstract:
This article presents a comparative overview of the most relevant findings from
studies of the impact of microcredit institutions like the Grameen Bank and BRAC
in Bangladesh. It first evaluates the evidence on economic impacts, which suggests
that the vulnerability of bank members has been reduced even if there is no
consensus about whether the two institutions also reduce poverty. It then considers
the social impact, especially in relation to the situation of poor women and to
various spill-over effects in different spheres of social and economic life.
McI ntosh, C.,A. de J anvry, et al. (2005).
"How rising competition among microfinance institutions affects incumbent
lenders." Economic Journal 115(506): 987-1004.
Abstract:
This article uses data from Uganda's largest incumbent microfinance institution to
analyze the impact of entry by competing lenders on client behaviour. We observe
that rising competition does not lead to an increase in client dropout rate, but
induces a decline in repayment performance and savings deposited with the
incumbent, suggesting rising multiple loan-taking by clients. This joint effect on
dropout and repayment is consistent with some negative information about clients
and is being shared across lenders. However, the observed decline in repayment
rates in a context of rising multiple loan-taking shows that information sharing
about clients is far from complete.
Easton,T. (2005).
The hidden wealth of the poor. Economist, 377 (8451): 3-6, 11/5/2005.
Notes:
This article recognises microfinance as a strategy towards poverty alleviation.
Traditionally, the poor were not viewed as investment worthy and were excluded
from financial services. Other barriers to developing financial services for the poor
include high and volatile inflation in developing countries, incompetent
governments, and a lack of necessary legal framework for financial services.
Corruption is a major deterrent to sound financial services because it raises the cost
of each financial transaction and it undermines customers' confidence in the
financial system. A World Bank study in India found that borrowers paid bribes
ranging from 8 to 24% of the price of their loans. Also, inadequate public services
like electricity to power computers make it difficult for financial firms to expand
their services.
More recently (since 1970's), there is a rise in experimentation and provision of
microfinance for the poor that uses a bottom-up approach, ranging from credit,
savings, remittances, to insurance. Non-profit organizations such as Opportunity
International in Colombia and Grameen Bank in Bangladesh offer small loans to
the very poor with low interest rates. Loans are offered to group members who
must monitor and keep each other accountable for repayments, and in so doing,
members are allowed to borrow larger sums of money. Microfinance seems
successful in poverty alleviation. A World Bank report shows that there is a strong
correlation between financial access and higher incomes. Increasingly, local and
international banking giants are tapping into the microfinance market.
McI ntosh, C.,A. de J anvry, et al. (2005).
"How rising competition among microfinance institutions affects incumbent
lenders." Economic Journal 115(506): 987-1004.
Abstract:
This article uses data from Uganda's largest incumbent microfinance institution to
analyse the impact of entry by competing lenders on client behaviour. We observe
that rising competition does not lead to an increase in client dropout rate, but
induces a decline in repayment performance and savings deposited with the
incumbent, suggesting rising multiple loan-taking by clients. This joint effect on
dropout and repayment is consistent with some negative information about clients
and is being shared across lenders. However, the observed decline in repayment
rates in a context of rising multiple loan-taking shows that information sharing
about clients is far from complete.
McI ntosh,C.andB.Wydick(2005).
"Competition and microfinance." Journal of Development Economics 78(2): 271-
298.
Abstract:
Competition between microfinance institutions (MFIs) in developing countries has
increased dramatically in the last decade. We model the behavior of non-profit
lenders, and show that their non-standard, client-maximizing objectives cause them
to cross-subsidize within their pool of borrowers. Thus when competition
eliminates rents on profitable borrowers, it is likely to yield a new equilibrium in
which poor borrowers are worse off. As competition exacerbates asymmetric
information problems over borrower indebtedness, the most impatient borrowers
begin to obtain multiple loans, creating a negative externality that leads to less
favorable equilibrium loan contracts for all borrowers.
Benjamin,L.,J .S.Rubin,etal.(2004).
"Community development financial institutions: Current issues and future
prospects." Journal of Urban Affairs 26(2): 177-195.
Abstract:
Community development financial institutions (CDFIs) help to address the
financial needs of under-served, predominantly low-income communities. CDFIs
include community development banks, credit unions, business and
microenterprise loan funds, and venture capital funds. Although CDFIs are a
rapidly growing and an increasingly important area of community economic
development, they have not received proportionate attention from academic
researchers. This article begins to address the gap. It outlines the history of the
CDFI industry and details how CDFIs are responding to three specific
development needs: basic financial services; affordable credit for home purchase,
rehabilitation, and maintenance; and loan and equity capital for business
development. The article then considers the strengths and limitations of CDFIs,
concentrating especially on the relationship between CDFIs and conventional
financial institutions. It concludes by examining the impact that these alternative
financial institutions realistically can hope to achieve.
Mosley, P.andJ . Rock.(2004). "
Microfinance, labour markets and poverty in Africa: astudy of six institutions."
Journal of International Development 16(3): 467.
Abstract:
We examine a range of six African microfinance institutions with a view to
assessing and if possible enhancing their poverty impact. The impact of
microfinance loans is variable between institutions, with a tendency in particular
for savings services to be taken up by people well below the poverty line,
especially in South Africa and Kenya. However, many benefits to the poor from
microfinance programmes, in Africa at least, are likely to come via an indirect
route, via 'wider impacts' or 'spin-offs', rather than by through direct impacts on
borrowers.

NEED & SCOPE OF MI CROFI NANCE
Micro financing very much needed in India.
(1) Regulation of microfinance institutions
Provision of saving services
Product innovation
Organizational issues in microfinance
Poverty impact of microfinance

OBJ ECTI VES
To study the role of nationalized (commercial) Banks for promoting
microfinance services
To identify the opportunities and the threats of scheme provided by the
Banks for microfinance
To study some challenges faced by commercial banks for encouraging
spread of Microfinance services among rural population
To suggested the possible alternatives for positioning the scheme of banks to
promoting microfinance services
Find out the issue of the micro finance
Comparative Analysis of Micro-finance Services offered to the poor.
How does the client of two main models of microfinance, the SHG and the
MFI model, differ?
Does the level of indebtedness to moneylenders depend on the type of micro
finance model one is client of?

Type of Research- Exploratory Research

Data sources: The research is based on secondary data and the data is collected
from various websites, Journals, Magazines, Articles and Research Paper.