ASSIGNMENT ON MICRO-FINANCE

SUBMITTED TO: MR. DAVINDER PAL SINGH

SUBMITTED BY: GAGAN JOT SINGH MBA IIIrd Sem Roll no.- 2107

Micro finance

Introduction:Microfinance refers to small scale financial services for both credits and deposits- tha are provided to people who farm or fish or herd; operate small or micro enterprise where goods are produced, recycled, repaired, or traded; provide services; work for wages or commissions; gain income from renting out small amounts of land, vehicles, draft animals, or machinery and tools; and to other individuals and local groups in developing countries in both rural and urban areasMarguerite S. Robinson.The Indian state put stress on providing financial services to the poor and underprivileged since independence. The commercial banks were nationalized in 1969 and were directed to lend 40% of their loan able funds, at a concessional rate, to the priority sector. The priority sector included agriculture and other rural activities and the weaker strata ofsociety in general. The aim was to provide resources to help the poor to attain selfsufficiency. They had neither resources nor employment opportunities to be financially independent, let alone meet the minimal consumption needs. To supplement these efforts, the credit scheme Integrated Rural Development Programme (IRDP) was launched in 1980. But these supply side programs (ignoring the demand side of the economy) aided by corruption and leakages, achieved little. Further, The share of the formal financial sector in total rural credit was 56.6%, compared to informal finance at 39.6% and unspecified sources at 3.8%. [RBI 1992]. Not only had formal credit flow been less but also uneven. The collateral and paperwork based system shied away from the poor. The vacuum continued to be filled by the village moneylender who charged interest rates of 2 to 30% per month (Rural Credit and Self Help Groups- Microfinance needs and Concepts in India- K.G.Karmakar 1999). 70% of landless/marginal farmers did not have a bank account and 87% had no access to credit from a formal source.( World Bank NCAER, Rural Financial Access Survey 2003)It was in this cheerless background that the Microfinance Revolution occurred worldwide. In India it began in the 1980s with the formation of pockets of informal Self Help Groups (SHG) engaging in micro activities financed by Microfinance. But Indias first Microfinance Institution Shri Mahila SEWA Sahkari Bank was set up as an urban

co-operative bank, by the Self Employed Womens Association (SEWA) soon after the group (founder Ms. Ela Bhatt)was formed in 1974.The first official effort materialized under the direction of NABARD.(National Bank For Agriculture And Rural Development).The Mysore Resettlement and Development Agency (MYRADA) sponsored project on Savings and Credit Management of SHGs was partially financed by NABARD during 1986-87.[Mainstreaming of Indian Microfinance- P.Satish, 2005]

MFIs, Self Help Groups , Income Generation and Women Empowerment

Under the microfinance programme, loans are extended to the Self Help Groups (SHG)who pool a part of their income into a common fund from which they can borrow. The members of the group decide on the minimum amount of deposit which ranges from Rs20 to Rs 100 per month depending upon the size of the group. The group funds are deposited with a Micro Finance Institution (MFI) against which they usually lend (The deposits are usually placed with a bank by the MFI) at a credit deposit ratio of 4:1 but ther atio improves with account performance record i.e. prompt repayment of loans. The group funds is the way micro savings are enforced ,though it may seem like a collateral The loan ticket sizes are usually Rs 2000/- to Rs 15,000/(Source: Field Survey by Author and Impact Assessment of Microfinance in India- Frances Sinha and the impact assessment team: EDA Rural Systems Pvt. Ltd, Gurgaon, 2003),The MFIs stress on asset creation by the SHGs and extend loans for production and provides training for the same. If any member needs credit beyond the stipulated limits they are allowed to draw from group funds and the amount is settled in the periodic(monthly) group meetings. SHGs consisting of poor members with identical socioeconomic backgrounds are usually more sensitive to the credit needs of the poor. Though loan repayment is a joint liability of the group but, in reality, individual liability. is stressed upon. Maintaining group reputation leads to the application of tremendous peer pressure. In India and other Asian countries the majority of SHGs consist of women because, in these countries, Self Employment through Microfinance was perceived as a powerful tool for emancipation of women. It has been observed that gender equality is a necessary condition for economic development. The World Bank reports that societies that

discriminate on the basis of gender are in greater poverty, have slower economic growth, weaker governance, and lower living standards. (World Bank. Engendering Development: Through Gender Equality in Rights, Resources, and VoiceSummary. (Washington: World Bank, 2001) www.worldbank.org/gender/prr/engendersummary.pdf.)And the results are encouraging. Loans obtained from MFIs are utilized in agriculture and small businesses. Independent incomes and modest savings have made women self confident and helped them to fight poverty and exploitation. [Sampark (2003) Mid-Term Impact Assessment Study of CASHE Project in Orissa].Previously we had to cringe before our husbands to ask for one rupee. We do not have to wear tattered sarees anymore and, today, we have the confidence to come and talk to you without seeking permission from our husbands-As told to the author in the Field Survey. Women, the world over, tend to spend increasing proportion of their income on the welfare of the family . The same phenomenon is observed among women made self sufficient by micro finance. These findings get corroborated in the field survey of the author. We can now put our children in school (Field Survey) .Though instances of husbands of women being the real beneficiaries and women taking a back seat after the loan is sanctioned is also there. [K.G.Karmakar]. However, the author, during the survey, witnessed a novel way the issue had been tackled by Sreema Mahila Samity, a very active NGO engaged in providing Microfinance in West Bengal. They simply created Self Help Groups for men and enabled them to borrow and engage in micro activities on their own. This way, the familys income improved without disturbing the inner harmony.

Financing the SHGs

The financial needs of the SHGs are catered to by various financial institutions: the Commercial Banks, Co-operative Banks, Co-operative Credit Societies and Regional Rural Banks (RRB). There are around 94000 Co-operative outlets, 14000 branches of the RRBs and 33,000 suburban branches of the commercial banks. (Financial Services for Low Income Families: An Appraisal, by Sanjay Sinha 2003) They finance the SHGs directly or route their funds through a Microfinance Institution set up by an NGO (NGOMFI) or Non-Banking Financial Companies (NBFC).Womens indicators of empowerment through microfinance

 Ability to save and access loans Opportunity to undertake an economic activity Mobility-Opportunity to visit nearby towns Awareness- local issues, MFI procedures, banking transactions Skills for income generation Decision making within the household Group mobilization in support of individual clients- action on social issues Role in community development activities Source: Impact Assessment, Frances Sinha (2003)The NGO-MFIs (the major source of MFIs in India) disburse loans from the line of credit which is provided to them by a Financial Institution. The advantages of intermediation of,funds through NGOs are manifold: It leads to reduction in time of identification of creditworthy people, documentation and recovery. The fall in transaction costs is not less than 40 %.( K.G.Karmakar).Along with developing saving and credit facilities, the NGOs engage in: (1)Providing Basic Education (2) Developing a sense of Health and Hygiene (3) Encourage family planning. (4) Creating Awareness about environment protection

(5)Most important, nurturing an environment of gender equality. These activities are the rudiments of sustained economic development. Basically, the MFIs in India are of three categories: (i) Not for profit MFI, which include the NGOs (ii) Mutual Benefit MFIs, which include mutually-aided co-operative credit and (iii) for Profit MFIs, which include the Non-Banking Financial Companies (NBFC).

Microfinance is Not a Silver Bullet

"Microfinance is but one strategy battling an immense problem. "In the last two decades, substantial progress has been made in developing techniques to deliver financial services to the poor on a sustainable basis. Most donor interventions have concentrated on one of these services, microcredit. For microcredit to be appropriate however, the clients must have the capacity to repay the loan under the terms by which it is provided. Otherwise, clients may not be able to benefit from credit and risk being pushed into debt problems. This sounds obvious, but microcredit is viewed by some as "one size fits all." Instead, microcredit should be carefully evaluated against the alternatives when choosing the most appropriate intervention tool for a specific situation. "Microcredit may be inappropriate where conditions pose severe challenges to standard microcredit methodologies. Populations that are geographically dispersed or nomadic may not be suitable microfinance candidates. Microfinance may not be appropriate for populations with a high incidence of debilitating illnesses (e.g., HIV/AIDS). Dependence on a single economic activity or single agricultural crop, or reliance on barter rather than cash transactions may pose problems. The presence of hyperinflation, or absence of law and order may stress the ability of microfinance to operate. Microcredit is also much more difficult when laws and regulations create significant barriers to the sustainability of microfinance providers (for example, by mandating interest-rate caps). (http://cgap.org)

While microfinance can not reach all economic segments of society, it has been shown to reach segments previously un-serviced by other financial markets.

Examples of Some Alternative Strategies Grants can be used to help overcome the social isolation, lack of productive skills, and low selfconfidence of the extreme poor, and to prepare them for eventual use of microcredit. Small grants and other financial entitlements can work well as first steps to "graduate" the poor from vulnerability to economic self-sufficiency. A successful example is the BRAC Income Generation for Vulnerable Groups Development program in Bangladesh. This program has graduated more than 660,000 destitute women through free food, training, health care, and savings to BRAC's mainstream microcredit program. Investments in infrastructure, such as roads, communications, and education, provide a foundation for economic activities. Community-level investments in commercial or productive infrastructure (such as market centers or small-scale irrigation schemes) also facilitate business activity. Employment programs prepare the poor for self-employment. Food-for-work programs and public works projects fit this model. In many cases, these programs may be out of reach for cashstrapped local governments but within the purview of donors. Non-financial services range from literacy classes and community development to market-based business-development services. While non-financial services should be provided by separate institutional providers, there are clear, complementary links with the demand for and impact of microcredit. For example, improved access to market opportunities stimulates - and depends on -

securing credit to cover the costs (product design, transport, etc.) of taking advantage of those opportunities. Legal and institutional reforms can create incentives for microfinance by improving the operating environment for both microfinance providers and their clients. For example, streamlining micro-enterprise registration, abolishing caps on interest rates, loosening regulations governing non-mortgage collateral, strengthening the judicial system, and reducing the cost and time of property and asset registration can foster a supportive climate for microfinance." 2.Demand of Micro Finance Services in India Due to its large size and population of around 1000 million, India's GDP ranks among the top 15 economies of the world. However, around 300 million people or about 60 million households, are living elow the poverty line. It is further estimated that of these households, only about 20 percent have access to credit from the formal sector. Additionally, the segment of the rural population above the poverty line but not rich enough to be of interest to the formal financial institutions, also does not have good access to the formal financial intermediary services, including savings services. A group of micro-finance practitioners estimated the annualised credit usage of all poor families (rural and urban) at over Rs 45,000 crores, of which some 80 percent is met by informal sources. This figure has been extrapolated using the numbers of rural and urban poor households and their average annual credit usage (Rs 6000 and Rs 9000 pa respectively) assessed through various micro studies. Credit on reasonable terms to the poor can bring about a significant reduction in poverty. It is withthis hypothesis, micro credit assumes significance in the Indian context. With about 60 million households below or just above the austerely defined poverty line and with more than 80 percent unable to access credit at reasonable rates, it is obvious that there are certain issues and problems, which have prevented the reach of micro finance to the needy. With globalisation and liberalisation of the economy, opportunities for the unskilled and the illiterate are not increasing fast enough, as compared to the rest of the economy. This is leading to a lopsided growth in the

economy thus increasing the gap between the haves and have-nots. It is in this context, the institutions involved in micro finance have a significant role to play to reduce this disparity and lead to more equitable growth.

Demand for credit

In terms of demand for micro-credit, there are three segments: At the very bottom in terms of income and assets, and most numerous, are those who are landless and are engaged in agricultural work on a seasonal basis, and manual labourers in forestry, mining, household industries, construction and transport. This segment requires, first and foremost, consumption credit during those months when they do not get labour work, and for contingencies such as illness. They also need credit for acquiring small productive assets, such as livestock, using which they can generate additional income. The next market segment is small and marginal farmers and rural artisans, weavers and those self employed in the urban informal sector as hawkers, vendors, and workers in household microenterprises. This segment mainly needs credit for working capital, a small part of which also serves consumption needs. In rural areas, one of the main uses of working capital is for crop production. This segment also needs term credit for acquiring additional productive assets, such as irrigation pumpsets, borewells and livestock in case of farmers, and equipment (looms, machinery) and Micro Finance in India This market segment also largely comprises the poor but not the poorest. The third market segment is of small and medium farmers who have gone in for commercial crops such as surplus paddy and wheat, cotton, groundnut, and others engaged in dairying, poultry, fishery, etc. Among non-farm activities, this segment includes those in villages and slums, engaged in processing or manufacturing activity, running provision stores, repair workshops, tea shops, and various service enterprises. These persons are not always poor, though they live barely above the poverty line and also suffer from inadequate access to formal credit.

One market segment, which is of great importance to micro-credit is women. The 1991 Census figures reveal that out of total 2.81 million marginal workers, 2.54 million were women and their further break-up shows that out of a total of 2.67 million rural marginal workers, 2.44 million were females. Further, many more women were willing to work. This has been corroborated by the results of a survey done by the National Sample Survey Organisation (NSSO), 43rd round, which has revealed that there is a vide variety of work which rural women combine with household work. In the NSSO survey it has also been estimated that a large percentage of rural women in the age group of 15 years and above, who are usually engaged in household work, are willing to accept work at household premises (29.3 percent), in activities such as dairy (9.5 percent), poultry (3 percent), cattle rearing, spinning and weaving (3.4 percent), tailoring (6.1 percent) and manufacturing of wood and cane products etc. Amongst the women surveyed, 27.5 percent rural women were seeking regular full-time work, and 65.3 percent were seeking part-time work. To start or to carry on such work, 53.6 percent women wanted initial finance on easy terms, and 22.2 percent wanted working capital facilities, as can be seen from the table below: 2. Demand for Savings and Insurance Services: The demand for savings services is ever higher than for credit. Studies of rural households in various states in India show that the poor, particularly women, are looking for a way to save small amounts whenever they can. The irregularity of cash flows and the small amounts available for savings at one time, deter them from using formal channels such as banks. In urban areas also this is true, in spite of Assistance Required (by women marginal workers seeking or available for work at their household premises).Percent of Women Seeking Assistance No assistance The poor want to save for various reasons as a cushion against contingencies like illness, calamities, death in the family, etc; as a source of equity or margin to take loans; and finally, as a liquid asset. The safety of savings is of higher concern than interest rates. The demand for savings services is high in rural areas as well, as can be seen from a recent study of womens savings and credit movement in Andhra Pradesh. Almost all womens groups in their early years

begin with regular savings and their savings exceed the loans they give from their funds. Of course, part of this lower demand for credit is the inadequate absorption capacity of women, which comes from long years of exclusion from the economic sphere outside their homes. The demand for insurance services, though not very well articulated, is also substantial. This comes from the fact that not only incomes of microfinance customers low, but are also highly variable. Insurance by the poor is needed for assets such as livestock and pumpsets, for shelter. Crop insurance could be very useful to the rural poor. Finally, insurance against illness, disability and death would also reduce the shocks caused by such contingencies, which lead the poor into taking loans at such times at high interest.

Supply of microfinance
RBI data shows that informal sources provide a significant part of the total credit needs of the rural population. The magnitude of the dependence of the rural poor on informal sources of credit can be observed from the findings of the All India Debt and Investment Survey, 1992, which shows that the share of the non-institutional agencies (informal sector) in the outstanding cash dues of the rural households was 36 percent. However, the dependence of rural households on such informal sources had reduced of their total outstanding dues steadily from 83.7 percent in 1961 to 36 percent in 1991. This is shown in the table below. Outstandings from Informal Sources as a Percentage of Total Dues,for Various Occupational Categories of Rural HouseholdsAmong formal institutional sources, banks and co-operatives provided credit support to almost 56 percent of the rural households, while professional and agricultural money lenders were providing credit to almost one sixth of the rural households. Government of India (GOI) has made concerted efforts to provide micro-finance to the rural poor through the formal financial sector namely the co-operatives. However, the limited success of the co-operatives in the mid fifties to the sixties forged the need for nationalisation of

commercial banks (CB) in 1971 and the establishment of a large network to reach every village, and every segment of the population. In the mid-1970s, Regional Rural Banks (RRB) were also established to continue further the outreach of the banking sector in reaching the rural poor. All these programs were supported by a policy of mandated credit programs for the low-income households that were supported by the Integrated Rural Development Program (IRDP), launched in 1980. The IRDP was designed to provide a mix of subsidy from the government and credit from the banking system to enable the asset acquisition of the poor. As a result of these programs, India has one of the largest banking networks in the world with close to 50,000 CB outlets; 14,420 RRBs; and 90,000 primary agricultural co-operative societies. Close to 43 percent of the CB, and RRB branches are located in the rural areas. Even more impressive is the fact that, there is a financial intermediary branch for every 15,000 households, and a co-operative in every village. Due to the extensive expansion of the banking network and emphasis on lending to small borrowers, there have been a lot of small loans by banks. In terms of amount, this was 13.2 percent of the total credit outstanding from commercial banks and RRBs. As per RBI data for March 1994, the number of accounts below Rs 25,000 was 5.6 million, or 93.6 percent of total loan accounts, with 18.6 percent of the outstanding amount. Of these, accounts with outstanding below Rs 7500 comprised 80.5 percent of the number of accounts and 49.5 percent of amount outstanding. In terms of purpose, 45.8 percent of amount was for small agricultural loans, 20.2 percent for industry and 18.8 percent for trade and services. By March 1997, the number of small borrowal accounts with a credit limit below Rs 25,000, had come down by as many 0.6 million accounts to 5.0 million, or 90.1 percent of the outstanding loan accounts. This decline in number of accounts clearly shows the post liberalisation trend, with banks concentrating their efforts on larger loans and becoming ever more reluctant to extend credit to small borrowers. While banks have been engaged in financing small borrowers, the manner in which this is being done can hardly be called micro-finance. The procedures are cumbersome, the staff unfriendly and the transaction costs high. Repeat loans, except for crop production, are rare, even for borrowers who have repaid fully. Furthermore, even though the many of the loans extended to

the poor by the public sector financial institutions are subsidized, their ultimate cost to the borrowers is high: factoring in out-of-pocket costs, payments to middle men, wage and business loss due to time spent in getting the loan approved. Effectively, the total cost of funds to the borrower ranges between 2230 percent as 200,000. All this results in low repayment rates, leading to a vicious cycle of non-availability and non repayment. Supply of Savings and Insurance Services: In the case of savings services, again while banks have provided access to a large number of small depositors, the demand is nowhere near being met, particularly for small , frequent "recurring" deposits. Hence the poor turn to other means such as chits, bishis and savings mobilisation companies like Peerless and Sahara. Many such companies are fly-by night and as a result, the poor lose their money. The RBI has tightened up deposit taking activity since 1997, but this has, perversely, also led to legitimate MFIs being not allowed to take deposits and thus provide savings services to the poor. Transaction costs of savings in formal institutions were as high as 10 percent for the rural poor. The supply of insurance services to the poor has been increased substantially over the 1990s, and there are a large number of low premium schemes covering them against death, accidents, natural calamities, and loss of assets due to fire, theft, etc. However, the usage is limited by low awareness among the poor. Crop and livestock insurance, however, are quite expensive and their reach to the poor is negligible. Livestock and asset insurance was extended top the poor along with the IRDP subsidised loans, and thus remained scheme driven, with little awareness among the customers. 4. Micro-Finance Institutional Structure: The different organisations in this field can be classified as "Mainstream" and "Alternative" Micro Finance Institutions (MFI).

Mainstream Micro Finance Institutions

National Agricultural Bank for Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), Housing Development Finance Corporation (HDFC), Commercial

Banks, Regional Rural Banks (RRBs), the credit co-operative societies etc are some of the mainstream financial institutions involved in extending micro finance.

Alternative Micro Finance Institutions

These are the institutions, which have come up to fill the gap between the demand and supply for microfinance. MFIs were recently defined by the Task Force as "those which provide thrift, credit and other financial services and products of very small amounts, mainly to the poor, in rural, semi-urban or urban areas for enabling them to raise their income level and improve living standards." The MFIs can broadly be classified as: ! NGOs, which are mainly engaged in promoting self-help groups (SHGs) and their federations at a cluster level, and linking SHGs with banks, under the NABARD scheme. ! NGOs directly lending to borrowers, who are either organised into SHGs or into Grameen Bank style groups and centres. These NGOs borrow bulk funds from RMK, SIDBI, FWWB and various donors. ! MFIs which are specifically organised as cooperatives, such as the SEWA Bank and various Mutually Aided Cooperative Thrift and Credit Societies (MACTS) in AP. ! MFIs, which are organised as non-banking finance companies, such as BASIX, CFTS, Mirzapur and SHARE Microfin Ltd. Some of the leading alternative microfinance institutions in this segment are SEWA Bank in Gujarat, which also runs federations of SHGs in nine districts; ASSEFA and its Sarva Jana Seva Kosh Ltd, the and ASA in Tamil Nadu: SHARE, BASIX, CARE and MACTs in AP promoted among others by the Cooperative Development Foundation (CDF); MYRADA in Karnataka, which has promoted Sanghamitra, a company of its village savings and credit sanghas; PRADAN which has established a large number of SHGs and federated them under Damodar in Bihar, Sakhi Samiti in Rajasthan and the Kalanjiams in Tamil Nadu (the last now run by DHAN Foundation); ADITHI in Bihar has established Nari Nidhi, a federation of womens groups;

PREM in Orissa has done the same through the Utkal Mahila Sanchay O Bikas; the Rashtriya Gramin Vikas Nidhi which runs credit and savings programs in Assam and Orissa, on the lines of the Grameen Bank, Bangladesh, as does SHARE in AP, ASA in Tamil Nadu and RDO in Manipur. 5. The Problems Associated with Mainstream MFIs enable the reach of micro finance services to the needy, the problems associated with the legal, regulatory, organisational systems and the attitudes should be addressed to and the desired changes brought in these, to make them more effective. The mainstream financial institutions are flush with funds and have access to enormous amounts of low cost savings deposits. Indeed, the poorer the region, the lower the credit deposit ratio most of the eastern UP, Bihar, Orissa and the North-East have Credit Deposit ratios of 20-30 percent. Thus while banks are physically present in rural areas and offer concessional interest rates, rural producers are not able to access, with the result that the rest of the deposits are finding their way into the financial sector. Some of the main reasons for the above are:

Borrower Unfriendly Products and Procedures

With a majority of the customers being illiterate, and a majority of them needing consumption loans and a majority of them requiring high documentation and collateral security, the products are not reaching the rural poor.

Inflexibility and Delay

The rigid systems and procedures result in lot of time delay for the borrowers and de-motivate them to take further loans. High Transaction Costs, both Legitimate and Illegal Although the interest rate offered to the borrowers is regulated, the transaction costs in terms of the number of trips to be made, the documents to be furnished etc. plus the illegal charges to be paid, result in increasing the cost of borrowing. Thus, making it less attractive to the borrowers. Social Obligation and not a Business Opportunity Micro-finance has historically been seen as a social obligation rather than a potential business

opportunity.

Financing to Alternative MFIs

NABARD Act does not permit them to refinance any private sector FI and do any direct financing (NABARD's direct lending to micro-finance NGOs so far has been out of donor funds), similarly SIDBI Act restricts it from extending loans to the agricultural and allied sectors, whereas many of the members of the self help groups are engaged in such activities.

Legal and Regulatory Framework

! The policymakers feel that farmers and poor people need low interest and subsidized credit. Thereby we have regulated interest regime for the loans up to Rs 25,000 and Rs 2,00,000/- with an interest cap of 12 percent and 13.5 percent respectively. They believe that poor cannot save, they are unwilling to repay the loans, and the administrative costs of servicing them are high. ! Also small loans have been used as a tool for disbursing political patronage, undermining the norm that loans must be repaid. Thus the mainstream institutions feel that these loans are risky, difficult to serve and have a low or negative net spread. ! The Regional Rural Banks Act does not permit any private share holding in any RRBs, and the Cooperative Act of all states do not permit district level co-operative banks to be set up except by the state government. The result of these two laws together is that rural credit has been a monopoly of state owned institutions. Problems for Alternative Micro-Finance Institutions The main aim with which the alternative MFIs have come up is to bridge the increasing gap between the demand and supply. A vast majority of them set up as NGOs for getting access to funds as, the existing practices of mainstream financing institutions such as SIDBI and NABARD and even of the institutions specially funding alternatives, such RMK and FWWB, is

to fund only NGOs, or NGO promoted SHGs. As a result, the largest incentive to enter such services remains through the nonprofit route. The alternative finance institutions also have not been fully successful in reaching the needy. There are many reasons for this: ! Financial problems leading to setting up of inappropriate legal structures ! Lack of commercial orientation ! Lack of proper governance and accountability ! Isolated and scattered

Inappropriate Legal Forms

NGOs invented micro-finance but NGOs are not the best type of agencies to carry out micro-finance on a long-term sustainable basis. If an MFI opts to become an NGO, it has the following problems: ! The major source of funds of NGOs are grants, which are very limited. ! If the NGOs earn a substantial part of their income from lending activity, they violate section 11 (4) of the Income Tax Act and can lose their charitable status under Section-12. ! Moreover, NGOs do not have the appropriate financial structure for carrying out micro finance activities. NGOs being registered as societies or trusts, do not have any equity capital and can never be "capital adequate". The other alternative for an MFI is to become a cooperative or a company. As in the long run, the primary source of lending funds for MFIs is deposits, till that stage, the MFI has to rely on borrowings. To be able to attract borrowings, the MFI has to have equity capital. Thus, it is only possible to establish a financially sustainable MFI either as a cooperative or as a company.

In most states, with exception of Andhra Pradesh, Maharashtra, and Gujarat, cooperatives are politicized and state controlled and thus not an appropriate form of incorporation for an MFI. That leaves an MFI with the choice to be incorporated as a company and then become an NBFC or a Bank. The latter requires a license and a minimum start up equity of Rs100 crores, which is very difficult for an MFI to mobilise. The concept of Local Area Bank, with a lower start up capital of Rs 5 crores, has not yet been operationalised by the government. If an MFI opts to become an NBFC, it has the following problems ! The minimum entry-level capital requirements is Rs 2 Crores, wef April 1999. ! It is difficult to mobilise any borrowings from Indian Financial Institutions due to the negative image of NBFCs in general. Further, even deposit mobilisation is not possible at least for the first three years, till a satisfactory credit rating is obtained. ! That leaves the option of borrowing from foreign institutions, which is difficult in the first place, due to RBIs requirement of at least two credit ratings. Further, very few foreign institutions are willing to give rupee denominated loans. Thus the MFI taking foreign currency loans are subject

Lack of Commercial Orientation

Striving to make the customers credit available at low cost with subsidies and grants, most of the alternate MFIs achieve a lot of success in their programs in the initial period, but they fail to maintain the same record in the long run because of lack of commercial orientation thus making it unsustainable.

Lack of Proper Governance and Accountability

Governance and accountability are limited in case of non-profits and need to be improved. Their boards must be made aware of their financial liabilities in case of failure. The lenders should be more stringent and insist on nominating a few directors.

Isolated and Scattered The alternate MFIs are isolated and scattered. There is no proper coordination among them and also there is lack of information dissemination. Moving Forward Most of the issues stated above are being tackled at various levels and the initiatives if successful, could substantially remove these hurdles. Over the last few years, the Government of India has been encouraging micro-finance as an alternative to IRDP type of poverty alleviation programs because of the sustainability of micro-finance activities. In the last two Budget Speeches, the Finance Ministers have talked about the need to enhance the reach of the MFIs. The RBI also made a special mention of micro-finance in its credit policy announced in April 1999. The RBI has established a micro-credit cell; NABARD has set up a Micro-credit Innovations Department, while HUDCO is also formulating a similar plan. The issue of inappropriate legal form for MFIs is being addressed by a Task Force setup by the Reserve Bank of India, which among other things is looking into the regulatory and legal issues concerning microfinance in India .An increasing number of MFIs have begun to address the issue of financial sustainability of their programs and have started taking effective steps towards achieving sustainability. Many of them have increased their interest rates, at least to cover their costs. Some of them have taken steps to convert themselves into for-profit corporations and have sought commercial investors to invest in them. These will not only make microfinance more commercially oriented but will also increase the quality of governance. Another welcome development in the Indian micro-finance sector in recent years has been the establishment of networks of micro finance practitioners. These networks not only help in creating awareness but also help in formation, experience sharing etc. These could also develop into a Self Regulatory Organisation of microfinance institutions.

Microfinance-Credit Lending Models

Microfinance institutions are the oldest financial institutions in the world, but with time they have adapted to the changes, and have started using various credit lending models. The Microfinance community has divided itself into hierarchies. Some of the popular Microfinance credit lending models adopted across the world are:

Associations: In this context, a target community forges together to form an association through which a variety of microfinance activities are initiated. The microfinance activities may also include savings. The associations may comprise of youth, women, or be formed around cultural, religious, or political issues. In some of the countries a legal body can also form an association. These legal associations have certain advantages, like collection of insurance, fees, tax breaks, and provide other protective measures. Bank Guarantees: As the name implies, a bank guarantee is utilized when a loan from a commercial bank is needed. The guarantee can be set up externally through a donor/donation or a government agency, etc., or internally through using member savings. Bank guarantee loans can be extended to both individuals and a self-formed group. These loan funds may be used for insurance claims and loan recovery. Community banking: This financing model considers the whole community as one unit and facilitates the establishment of semi-formal and formal institutes through which microfinance are administered. Usually NGOs and other similar organizations take it upon themselves to form such institutions, and also educate the community members in diverse financial activities. Co-operatives: A co-operative is an independent association of people who come together voluntarily to meet their mutual economic, social and cultural aspirations and needs through a egalitarian controlled enterprise. Sometimes the cooperatives also include savings activities and member-financing as well. Credit Unions: A credit union is a member-driven unique self-help financial institute comprising of members of a specific group like labor unions or a social fraternity who assent to save money and make loans to each other out of that fund at reasonable interest rates. A credit union membership is free to all, and it follows a democratic approach in electing the director as well as the committee representatives. Grameen: The grameen model entails that a bank unit be composed with a field manager and a set of bank staff covering a specified area, like 15 to 20 villages. The banking service starts by

the manager and staff familiarizing themselves with the native people and explaining to them the intent, functions motives, and mode of operation. Finally, groups comprising of five future borrowers are formed, out of which only two people get the loan, and if within fifty weeks they return the principal plus interest, as per the banking rules, the others become eligible as well. This is done, so that there is a collective liability on the group, which serves as guarantee against the loan. Group: This model is based on overcoming individual shortcomings by the aggregated accountability and security engendered by the formation of a group of these individuals. This collective approach also helps in educating and building awareness, collective negotiation powers, peer pressure etc. Individual: This is the simplest and the oldest credit lending model where small loans are given straight to the borrower. In most cases such loans are accompanied by socio-economic services like education and skill development. Intermediaries: As the name suggests this model is a go-between organization operating between the lender and borrower. They play a critical role of creating credit cognizance like starting savings programs and thus raising the credibility of the borrowers to a sufficient level. These intermediaries can be NGOs, individuals, commercial banks etc. Non-Governmental Organizations: NGOs are very active in the field of micro-credit, be it creating consciousness of the importance of micro-credit, or developing tools and resources to monitor and identify righteous practices. The NGOs have also created many opportunities to help people learn all about micro-credit practices and principles through organizing workshops, seminars, training programs etc. Peer Pressure: This model uses moral obligation to create a link between borrowers and other project nominees to ensure participation and repayment in micro-credit programs. Rotating Savings and Credit Associations: In this model a group of people join together and make periodic cyclical contributions to a common fund that is given to a member in a lump sum.

After receiving the amount the member starts paying back by making regular contributions. Bidding or lottery makes the decision about whom the money should go to.

Benefits of microfinancing:Most of the worlds poor lack access to basic financial services that would help them manage their assets and generate income. This is especially true for the 900 million extremely poor people who live in rural areas of developing countries. Good management of even the smallest assets, such as livestock, can be crucial to very poor people, who live in precarious conditions, threatened by lack of income, shelter and food. To overcome poverty, they need to be able to borrow, save and invest, and to protect their families against adversity. With little income or collateral, poor people are seldom able to obtain loans from banks and other formal financial institutions. Microfinance is one way of fighting poverty in rural areas, where most of the worlds poorest people live. It puts credit, savings, insurance and other basic financial services within the reach of poor people. Through microfinance institutions such as credit unions, financial nongovernmental organizations and even commercial banks, poor people can obtain small loans, receive money from relatives working abroad and safeguard their savings. The microfinance revolution started with the recognition that poor people needed access to loans and that they could use these funds productively. It has also changed the perception that poor people are not credit worthy. Records have shown that, instead, they are a good risk, with higher repayment rates than conventional borrowers. In some of the most successful microfinance institutions, repayment rates are as high as 98 per cent. As microfinance has evolved, there has been an increasing recognition of the importance of savings, often referred to as the the forgotten half of microfinance. During the 1990s we came to realize that there was a pattern emerging in how poor people were using the very large microfinance networks. In the networks that offered both credit and savings services, there were often as many as five savers for each borrower. While credit is important, it is only one of the many different kinds of financial services that poor people need to improve their lives.

For example, the Unit Desai of Bank Rakyat Indonesia, which has been one of the most successful providers of microfinance services in the region, counts more than 28 million savers, for only three million borrowers. The large financial cooperative networks in West Africa also have many more savers than borrowers among their members.

It has been argued that savers in those institutions are usually not the poorest people. Although this is true in many institutions, evidence has shown that even the poorest people value and need access to some form of savings. What characterizes the poorest is not only their very small income but also the irregularity of this income. This can actually discourage very poor people from taking a loan that comes with the obligation of a regular repayment schedule. Conversely, data gathered from money collectors around the world show that the poorest people often use their services to save, even when it comes at a high cost demonstrating the importance that poor people attach to saving.

The Microcredit Summit Campaign has the ambitious objective of reaching 100 million of the worlds poorest families by the year 2005. By the end of 2001, more than 2000 microfinance institutions were involved in the campaign, providing financial services, mostly loans, to almost 55 million individuals or groups. More than 21 million of those clients were women. There is an urgent need for microfinance institutions to improve their ability to reach the poorest families and to satisfy their growing demand for a range of financial services. This includes the safe and flexible savings services that poor people need and value. One way to meet the objectives of the Microcredit Summit Campaign is to help microfinance institutions that are legally authorized to provide simple savings services ensure that these services are available to very poor people. Although the amounts involved may be small, the loans, savings and insurance options that microfinance offers can give millions of rural men and women an opportunity to find their own solutions.

CONCLUSION
After the pioneering efforts of the last ten years, the microfinance scene in India has reached a takeoff point. With some effort substantial progress can be made in taking MFIs to the next orbit of significance and sustainability. This needs innovative and forward-looking policies, based on the ground realities of successful MFIs. This, combined with a commercial approach from the MFIs in making microfinance financially sustainable, will make this sector vibrant and help achieve its singleminded mission of providing financial services to the poor.