ABSTRACT

About Andhra Pradesh crisis, what are the measure

taken by RBI for the same thing, what are
microfinance company, how they work, overview of
Annapurna Microfinance, products, and how they
work with the poor people

Name- Subham Choudhury

Roll-No- 19DM017
SEC-B
MICRO FINANCE
ASSIGNEMENT
Submitted to- (Prof)R. K MISHRA
1-write and explain the Andhra Pradesh crisis in details?
Abstract
Andhra Pradesh is the motherland of Indian microfinance largely due to the early and
extraordinary work of its state government. In the late 1980s, it built the Self-Help Group-Bank
Linkage Programme (SHG-Bank Linkage) with support from the National Bank of Agriculture and
Rural Development and World Bank Loans. It invested heavily in client education and, along with
the not-for-profit sector, built up a robust microfinance portfolio.

But over the last two decades, many lenders that began as non-profit organizations have
transformed into commercial microfinance institutions (MFIs) — among them, BASIX, SHARE,
SKS, and Spandana. As compared to SHG-Bank Linkage, these institutions have posted faster
growth rates and reached far more borrowers.

Last month, the state government put a halt to that with the AP Microfinance Ordinance,
suspending operations of MFIs in the state and for all intents and purposes allowing borrowers to
stop repaying their loans. The announcement of the Ordinance stressed the need to protect the
poor — but the move might well, in the long term, leave them far worse off.

The government has complained that too many poor borrowers find themselves subject to
coercive collection practices by MFIs. It knows that its SHG members sometimes “double-dip” by
taking on additional loans from the commercial lenders, and it sees that they tend to repay MFIs
faster. However, there are explanations other than coercion that might explain that. MFI loans are
more expensive than SHG loans, so a customer with two loans outstanding might reasonably
choose to repay the MFI loan first. The MFIs’ disciplined system of doorstep loan management
might also account for the greater customer responsiveness.

Now, the manager of the government program, SERP, has pushed the accusation of coercive
practices to a new level, blaming the MFIs’ attempts to recover loans for the suicides of 54 men
and women. This is a serious allegation and, again, prompts the question of whether there might
be alternative explanations. At the most basic level, note that according to the National Crime
Records Bureau, suicides in India occur at the rate of 10.8 deaths per 100,000 people every year
(based on 2008 data). If we apply this rate to the 6 million clients who are members of SKS
Microfinance, we might expect that there would be 648 clients succumbing to suicide every year.
This reasoning, of course, is rather absurd; but so is drawing a link from borrower suicides to MFIs
without evidence. (For a far more subtle discussion of the drivers of suicide among Indian
farmers, see these articles by Palagummi Sainath, an editor at The Hindu.)

What we are really seeing in Andhra Pradesh is the fallout from a long-standing competition
between MFIs and the state government, each of which believes it should be the source of
financial services to the poor. The government feels that it has a mandate to alleviate poverty;
indeed, it has a responsibility to disperse US$22.2bn to SHG members by 2014. MFIs believe that
the poor are ideal customers who have the right to financial inclusion. The two clashed first in
2006, also in Andhra Pradesh, and that Krishna crisis left many large MFIs crippled. But that time,
private equity investors stepped in, and with strong inflows of both debt and equity capital, timely
access to skilled talent, and significant use of technology, MFIs in general managed to continue
growing and even to vault past the government program.
Now, with the AP Ordinance, the government seems determined to remove borrowers’ access to
MFIs. As a piece of legislation, the AP Ordinance has more to do with helping the state
government program enjoy a monopoly over the poor than with preventing strong-armed debt
collection.

Clearly it would be better for the government to understand that the poor have the right to make
choices — and that there are better ways to serve the poor than crippling its competition.

At the same time, the MFIs need to understand that social businesses are complex and that, as
they scale and become part of the mainstream financial system, they need to be more careful
managers, of both their operational reality and their external image. When the most substantial
plank in your reputation platform is poverty alleviation, perceptions are all-important. In contrast to
the Indian Information Technology Industry, which has done a good job of managing values and
reputation without moving the focus from commercial objectives, the MFIs have allowed others to
shape perceptions of them. They are perceived as lacking in transparency about their interest
rates and unable to effectively manage external stakeholders such as the media and the State.
This perception comes closer to the truth when a leading MFI allows a post-IPO spat among its
own leaders to play out in front of the public.

The fight over the poor seems to be getting uglier, but microfinance is too good a tool for financial
inclusion to be thwarted by poor positioning. If both sides do not look inwards and make adequate
course corrections, their destructive competition has the potential to set us back by 10 years.

The story covers a microfinance crisis in the southern Indian state of Andhra Pradesh, triggered
by sensationalized newspaper accounts of suicides among over-indebted clients of some of
India’s biggest microfinance institutions (MFIs): SKS Microfinance, Spandana, Share, and
others.
 These cases underscore rising debt stress among possibly tens of thousands of clients,
brought on by explosive growth of microfinance organizations in southern India.
 In the quest to meet their growth targets, loan officers often sell loans to clients already
indebted to other organizations
 The reports offered an opening for the state government, which runs a rival self-help
group (SHG) program, to pass a restrictive ordinance severely curtailing the MFIs.
 The crisis threatens microfinance not only in Andhra Pradesh, but nationwide, as the
Reserve Bank of India moves toward removing the priority sector designation that has
fueled the sector’s growth (by making it advantageous for banks to lend to MFIs).
 The blame for this unfortunate situation falls most squarely on the MFIs that failed to
restrain aggressive growth even as the market became increasingly saturated. Investors
must also swallow a big spoonful of blame. Because they paid dearly for shares in the
MFIs, they need fast growth to make their investments pay off.
 The divvying up of blame doesn’t stop there, however. Perhaps the most important
target is the public sector policy environment that has treated microfinance institutions as
orphan children of the financial sector rather than helping them to build solid
foundations. In fact, the environment in which MFIs have grown up could almost have
been expressly designed to promote over-lending.
  lack of control in the lending process of the MFIs themselves, and the protectionist
nature of India’s financial sector.
Measures Taken by the Government
The Sub-Committee of RBI Board headed by Shri Y.H. Malegam was appointed in October
2010 in the wake of the crisis like situation that originated from Andhra Pradesh (AP) following
controversy over the alleged abusive practices adopted by the MFIs involving exorbitant interest
rates, coercive recovery methods and multiple-loans. The Committee, examined the prevalent
practices of MFIs with regard to interest rate and lending and recovery practices, and explored
the scope for regulating these MFIs by RBI and the regulatory framework needed and gave
critical recommendations (Malegam, 2011). Current RBI guidelines for NBFC MFIs are based
on the recommendations of Malegam Committee.
The RBI is the sole regulator of financial services in India. RBI has also created separate
category of NBFC as “NBFC-MFIs” which are to be registered with RBI to continue their
microfinance operations. The RBI, pursuant to its decision to accept the recommendations of
the Malegam Committee (Malegam, 2011), brought NBFC-MFI under a separate regulatory
framework, through NBFC-MFI Directions. The basic elements of RBI Directions for NBFC-MFIs
are mentioned hereunder (rbi.org.in).

Capital Requirement – Entry Point Norms.

• All registered NBFCs intending to convert to NBFC-MFI must seek registration with immediate
effect and shall maintain Net Owned Funds (NOF) at Rs.5 crore (2 crore for North Eastern
Region).
Qualifying Assets
• NBFC-MFIs are required to maintain not less than 85 per cent of their net assets as Qualifying
Assets.
Multiple Lending and Indebtedness
• A borrower can be a member of only one SHG/JLG. He can borrow from NBFC-MFIs as a
member of a SHG or a member of a JLG or borrow in his individual capacity. Further, a SHG or
JLG or individual cannot borrow from more than 2 MFIs.

Ensuring Compliance with Conditionality's

Lending MFIs will have to ensure compliance with, among others, conditionality's relating to:
• Annual household income levels (Rs.100, 000 for rural and Rs.1, 60,000 for urban and semi-
urban households).
• Total indebtedness (not to exceed Rs.100, 000).
• Tenure of the loan not to be less than 24 months for loan amount in excess of Rs. 15,000 with
prepayment without penalty.
• Aggregate amount of loans, given for income generation, is not less than 50 per cent of the
total loans given by the MFIs and loan is repayable on weekly, fortnightly or monthly
installments at the choice of the borrower.
• Every NBFC-MFI has to be a member of at least one Credit Information Company (CIC).

Pricing of Credit
The interest rates charged by an NBFC-MFI to its borrowers will be the lower of the following:
• Cost of funds means interest cost and margin is a markup of a maximum of 10 per cent for
large NBFCs-MFI and 12 per cent for others
• Processing charges by NBFC-MFIs shall not be more than 1 % of gross loan amount.
Processing charges need not be included in the margin cap. Further, NBFC-MFIs shall recover
only the actual cost of insurance for group, or livestock, life, health for borrower and spouse.
• A customer needs to know that there are only three components in the pricing of a loan viz. the
interest charge, the processing charge and the insurance premium
• The interest charged to customer is calculated on a reducing balance basis.

Customer Education
• No security deposit/ margin/collateral are required to be kept by the borrower with the NBFC-
MFI.
• The borrower should ensure that he gets a loan card from the NBFC-MFI reflecting: the
effective rate of interest charged; all other terms and conditions attached to the loan; information
which adequately identifies the borrower; acknowledgement by the NBFC-MFI of all repayments
including instalments received and the final discharge.
• All entries in the Loan Card should be in the vernacular language.
• NBFC-MFI does not levy penalty on delayed payment.
• It mandatory for the NBFC-MFIs to prominently display in all its offices and in the literature
issued by it and on its website, the effective rate of interest being charged by it.
• There must be a minimum period of moratorium between the grant of the loan and the due
date of the repayment of the first instalment.

Capital Adequacy Norms

• All NBFC-MFIs shall maintain a capital adequacy ratio consisting of Tier I and Tier II Capital
which shall not be less than 15 per cent of its aggregate risk weighted assets. The total of Tier II
Capital at any point of time shall not exceed 100 per cent of Tier I Capital.

Customer Protection Initiatives

• NBFC-MFIs shall ensure that a Code of Conduct and systems are in place for recruitment,
training and supervision of field staff, incorporating the guidelines on Fair Practices Code. Also,
Recovery should normally be made only at a central designated place.

Self-Regulatory Organization (SRO)

• All NBFC-MFIs will have to become member of at least one Self-Regulatory Organization
(SRO) which is recognized by the Reserve Bank and will also have to comply with the Code of
Conduct prescribed by the SRO.

Monitoring of Compliance
•The responsibility for compliance to all regulations prescribed for MFIs lies primarily with the
NBFC-MFIs themselves. Banks’ lending to NBFC-MFIs will also ensure that systems practices
and lending policies in NBFC-MFIs are aligned to the regulatory framework.

2-Explain the work of a microfinance company of your choice.

Discuss the method of service delivery in details.

What Is a Microfinance Company?

What a microfinance company is has changed in recent years. Historically, the
importance of microfinance was that it served a great role in alleviating poverty.
According to Investopedia, "For many years, microfinance had this primary social
objective and so traditional MFIs consisted only of non-governmental organizations
(NGO), specialized microfinance banks and public sector banks."

The role of microfinance in economic development was that it helped struggling

individuals, and even communities, gain access to financial services, and hopefully,
rise from poverty. Microfinance companies, then, were generally nonprofit or
governmental institutions that sought to help the poor. Profit was never the goal for
microfinance companies.

What Is the Purpose of Microfinance?

The purpose of microfinance is to provide financial services to people "generally
excluded from traditional banking channels because of their low, irregular and
unpredictable income," according to ING, a global financial institution with a strong
European base. In other words, the purpose of microfinance is to help disadvantaged
households and entrepreneurs gain access to affordable financial services to help
them finance income-generating activities, accumulate assets through savings,
provide for family needs, and protect themselves against the risks of daily life, such as
illness, death, theft, natural disasters, says ING.

Whether for-profit or nonprofit, microfinance seeks to assist the poor, and

indeed, microfinance institutions seek to be the bankers of the poor. For-profit
microfinance companies see this sector as underserved and a great way to make a
profit. By contrast, nonprofit microfinance companies seek to help the poor for
altruistic reasons.
Microfinance was developed by a Bangladeshi economist Muhammad Yunus, says
ING, adding that he came to be known as "the banker of the poor." In 1976, Yunus
established Grameen Bank in Bangladesh, which provided "microcredit," literally the
extension of loans to impoverished borrowers. Before that, banks had generally
concentrated only on lending to middle- and upper-income clients, as well as the very
rich, of course. Yunis' idea of microcredit caught on quickly. It was so popular that it
led to similar microfinance institutions springing up all over the world, eventually
evolving into what is today known as microfinance.

For his efforts, Yunus won the 2006 Nobel Peace Prize. In awarding Yunus the peace
prize, which was actually awarded jointly to Yunus and his bank, the Nobel committee
noted that it was honoring Yunus and his bank "for their efforts to create economic and
social development from below." In other words, the committee paid homage to Yunus'
concept of creating economic opportunity from the ground up.

Annapurna Microfinance
Getting access to credit, sometimes, becomes difficult even for a salaried or self-employed professional.
Imagine, how would a poor un-employed individual get a loan amidst enormous banking formalities? A large
segment of people who live under poverty find it hard to get finance from established lending institutions. As
the country aim for an inclusive growth at all sectors, the provision of micro credit is certainly a powerful tool
that will bring financial inclusion.
Having visualized financial inclusion is the only way for development, Annapurna Microfinance helps poor
communities to establish small businesses in the society. The beneficiaries include fishermen, artisans,
farmers, small entrepreneurs, deprived communities etc.

Advantages and Features of Annapurna Microfinance

 Aimed at empowering poor women and their livelihood
 To improve the living conditions of the marginalized people
 To fund the small and micro business entrepreneurs
 Pension scheme for workers from the unorganized sectors
 Insurance scheme for the poor
 Loan for low-cost house building
.

What Are the Benefits of ANNAPURNA Microfinance?

There are literally dozens of benefits for microfinance, but the key pluses involve the
role of microfinance in economic development. Vitanna.org and Plan International
provide possibly the top benefits of microfinance:
 1. It allows people to provide for their families. Through microfinance, more
households are able to expand their current opportunities so that more income
accumulation may occur, says Vitanna.org, a financial services website.
2. It gives people access to credit. "By extending microfinance opportunities,
people have access to small amounts of credit, which can then stop poverty at a
rapid pace," says Vitanna.org. Plan International, a global organization dedicated
to advancing children’s rights and equality for women, agrees, stating: "Banks
simply won’t extend loans to those with little or no assets, and generally don’t
engage in the small size of loans typically associated with microfinancing.
Microfinancing is based on the philosophy that even small amounts of credit can
help end the cycle of poverty."
3. It serves those who are often overlooked in society.  About 95 percent of
some loan products extended by microfinance institutions are given to women,
as well as those with disabilities, those who are unemployed, and even those
who simply beg to meet their basic needs, Vitanna notes. Microfinance services
can help recipients take control of their own lives.
4. It creates the possibility of future investments. Microfinance disrupts the
cycle of poverty by making more money available. When basic needs are met,
families can then invest in better housing, health care, and even, eventually,
small business opportunities.
5. It is sustainable.  There's little risk with a $100 or loan, says Vitanna, adding:
"Yet $100 could be enough for an entrepreneur in a developing country to pull
themselves out of poverty." Plan International agrees, stating that a $100 loan
can be enough to launch a small business in a developing country that could help
the benefactor pull herself and her family out of poverty.
6. It can create jobs. Microfinance is also able to let entrepreneurs in impoverished
communities and developing countries create new employment opportunities for
others.
7. It encourages people to save. "When people have their basic needs met, the
natural inclination is for them to save the leftover earnings for a future
emergency," says Vitanna.
8. It offers significant economic gains even if income levels remain the
same. The gains from participation in a microfinance program including access
to better nutrition, higher levels of consumption, and eventually, growing
economies, even in small and impoverished communities.
9. It leads to better loan repayment rates. "Microfinance tends to target women
borrowers, who are statistically less likely to default on their loans than men. So
these loans help empower women, and they are often safer investments for
those loaning the funds," says Plan International. 
10. It extends education. Families receiving microfinance services are less likely to
pull their children out of school for economic reasons, says Plan International.

In India microfinance operates through two channels:

1. SHG – Bank Linkage Programme (SBLP)

2. Micro Finance Institutions (MFIs)
SHG – Bank Linkage Programme
This is the bank-led microfinance channel which was initiated by NABARD in 1992.
Under the SHG model the members, usually women in villages are encouraged to form
groups of around 10-15. The members contribute their savings in the group periodically
and from these savings small loans are provided to the members. In the later period
these SHGs are provided with bank loans generally for income generation purpose.

The group’s members meet periodically when the new savings come in, recovery of
past loans are made from the members and also new loans are disbursed. This model
has been very much successful in the past and with time it is becoming more popular.
The SHGs are self-sustaining and once the group becomes stable it starts working on
its own with some support from NGOs and institutions like NABARD and SIDBI.

Micro Finance Institutions

Those institutions which have microfinance as their main operation are known as micro
finance institutions. A number of organizations with varied size and legal forms offer
microfinance service. These institutions lend through the concept of Joint Liability Group
(JLG).

A JLG is an informal group comprising of 5 to 10 individual members who come

together for the purpose of availing bank loans either individually or through the group
mechanism against a mutual guarantee. The reason for existence of separate
institutions i.e. MFIs for offering microfinance are as follows:

 High transaction cost – generally micro credits fall below the break-even point of
providing loans by banks
 Absence of collaterals – the poor usually are not in a state to offer collaterals to
secure the credit
 Loans are generally taken for very short duration periods
 Higher frequency of repayment of installments and higher rate of Default

Annapurna Microfinance Products and Services

Annapurna Microfinance provides to poor men and women the following products and services.

SHG Loan

Women, who are unable to access credit through formal banking system, can get financial help
through income generation loan. Poor women, who are involved in micro businesses to support
their family, are identified and given credit assistance.
The loan provided under this scheme can be used for agriculture purposes, purchase of
agriculture related equipment, micro business enterprise, handicraft and handloom. The loan
amount could range from INR 8000 to INR 25,000. The repayment tenure is up to 36 months.
Safe Water and Sanitation to Households
Focusing on access to clean water, hygiene and sanitation, Annapurna Microfinance provides
loans to women to improve the living conditions. The credit is provided at affordable interest
rates for women to help their family live with a better sanitation. This product facilitates
construction of toilets, installation of water pipes, hand borewell, water purifier etc.
The loan amount could range between INR 2000 to INR 12,000. The repayment tenure is up to
24 months.
Crop Loan for Vegetable Cultivation

Both women and men can get a loan from Annapurna Microfinance for up to INR 25,000 for
cultivation purpose. The loan is provided exclusively for cultivation purpose. The borrowers can
repay the loan within 24 months.
Microenterprise Loan

People who are looking to start up a small business or improve the existing micro enterprise can
avail a loan for up to INR 20 Lakhs under this scheme. The loan can be availed individually or
together as a group. The repayment tenure is up to 36 months at the interest rate of 24%.
Dairy Development Loan

Dairy farming is one of the well-known occupations in the rural villages. Individuals who are
involved in dairy farming or want to set up a farm can avail a dairy development loan for up to
INR 1,50,000 at the interest rate of 23%. The loan can be repaid in 36 months. The preferred
clients are who have prior experience in the industry and have at least 2 cows.
Home Improvement Loan

The mission of this product to fund the poor people who want to repair or extend their own
house. Under this scheme, the customers can get funding starting from INR 20,000 to up to INR
1.5 Lakhs. The loan can be used to build a low-cost house for a comfortable living. The
repayment can be done up to 48 instalments.
Loans for Family Members of Leprosy Affected Patients

People who are affected with leprosy are often neglected in society. What they deserve is a
good opportunity to support their own life and family. The family members of leprosy affected
patients can get a loan up to INR 1 Lakh to start a small enterprise to become self-supportive.
The loan can be repaid in 36 instalments.
Loans for Widows, Unmarried Women, Single Mothers

Women who have no support of their better-half get an opportunity to avail a loan to become
self-supportive under this scheme. The purpose of the loan is to generate income through an
occupation. The maximum loan amount is up to INR 1 Lakh which can be repaid in 36 months.
Annapurna Student Education Loan

Students who have completed their higher secondary education can avail a loan to gain financial
support for further education. Maximum of 85% of the fee is provided as loan (subject to maximum of
INR 1 Lakh). The loan can be availed at an interest rate of 18% and repaid in 36 months.
Loans for Persons with Disability

Under this scheme, physically challenged individuals can get a loan for up to INR 1 Lakh which
can be repaid in 36 months. The purpose of the loan is to generate a regular income with the
loan amount.
Loans for Persons Belonging to the Community of Eunuch/Third Gender

It is a pity that third gender are often neglected a job opportunity in the society. Hence it is our
duty to create a friendly working atmosphere for survival. Annapurna Microfinance provides
exclusive loan for third gender community for up to INR 1 Lakh which can be used to generate
income regularly through a small enterprise.

A unique operating model

While MFIs offer a solution to banking exclusion, they also play a vital role in society, which

forces them to operate differently than traditional banking institutions:

 the eligibility criteria, assessed before granting each loan, do not focus on strong

financial guarantees (salary, assets, etc.), but rely instead on more “human” criteria: if

the loan under consideration will help launch a new activity, its viability evaluation will

also include several interviews with the borrower in addition to the application form.

 the real guarantee, required by banks in order to grant a loan, may be replaced by a

group solidarity mechanism. For example, with mutual funds or cooperatives, each

borrower serves as a guarantor for the other members within a “solidarity guarantee

group” such as self-help groups.

 MFIs build close relationships with beneficiaries of microloans, while providing strong

support to borrowers, in order to help them succeed in their projects, manage their

budgets, etc. In this way, in addition to classic banking services, the MFI may offer

training programs focusing on credit or family budgeting, developed solely for

educational purposes.

 the repayment methods for each loan may be adapted to suit the target audience, such

as using weekly payment dates.

 the products are adapted to the target audience in a way that has no real equivalent in

the traditional banking world. This is notably the case for group loans: the MFI requests
 to constitute a group of borrowers and grants a single microloan to the entire group.

Typically offered to the poorest borrowers, group loans do not require any guarantee, but

instead rely on the solidarity of all group members. This creates a kind of “social

guarantee”: the members are responsible to the MFI, as well as to their co-borrowers. 

How are loans granted?

 The tontine system in Africa, an ancestral practice that is still common today, relies on

an individual’s belonging to a group, which helps to forge relationships of trust and

solidarity: in this case, social ties seal the relationship, while trust builds the contract. In

some cases, tontines even operate among a group of people who all already know each

other, and involve offers of interest-free loans.

 MFIs transpose this informal yet efficient principle, by developing a solidarity economy

that always relies on mutual confidence. Before granting microloans, requests are

examined by a committee, which evaluates the borrower’s eligibility based on human

and social criteria (motivation, competence, experience, etc.), as well as the project’s

viability and repayment capacity. It’s a method that works: the repayment rate for

microloans is near 97% in emerging countries!

 Sometimes, an “oversight mechanism” is imposed, which functions through social

pressure, as is the case in Bolivia with its system of publically indicating “bad

borrowers.” 

Documents Required for a Microfinance Loan

Although the documentation required for getting a microfinance loan varies between lenders,
the following are the documents that are usually needed:
 Updated application form
 PAN card, copy of Passport, ration card
 Proof of office address
 Passport-size photos of the applicants and co-applicants
 Certified copies of AOA/MOA/Partnership deed
 Track record of repayment
 Audited financials of the previous 2 years
 ITR of partners/directors for the previous 2 years
 Bank account statements for the past 6 months
 Proforma invoice to the equipment that is to be financed
 For lawyers, CAs, architects, and doctors - Professional qualification certificates