404FIN Current Trends &

Cases in Finance
Chapter 1 : Microfinance
Prof : Manav Agarwal
9823962733
Manava_iom@bkc.met.edu
 Microfinance: Definition
“Microfinance is an economic development tool whose
objective is to assist the poor to work their way out of
poverty. It covers a range of services which include, in
addition to the provision of credit, many other services
such as savings, insurance, money transfers,
counselling, etc.” – Reserve Bank of India

In other words, Microfinance serves as a tool for providing

financial services to the low-income population., which do not
have access to the mainstream financial services.
 Microfinance: Definition
The proposed Microfinance Services Regulation Bill defines microfinance services as
“providing financial assistance to an individual or an eligible client, either directly or
through a group mechanism for :
1.Rs. 50000 or lesser amount, for an individual for small and tiny enterprise,
agriculture, allied activities (including for consumption purposes of such individual) or
2.Rs. 150000 or lesser amount for an individual for housing purposes, or
3.any other purpose not exceeding Rs. 150000
 Salient features of Microfinance
 Beneficiaries are from
low income group.
 Loans are of small
amount and Short
duration loans
 Loans are offered
without collateral. High
frequency of payment
 Loans are generally
taken for income
generation purposes
 Financial Needs
Disasters: Such as flood, fire, cyclone and man-made events like war
Investment Opportunities: Such as expanding a business, buying land or
equipments, improving housing, securing a job (may require giving a large amount
of money)
Lifestyle Needs: Such as wedding, funerals, childbirth, education of children,
widowhood, homebuilding or old age
Personal Emergencies: Such as sickness, injury, death, sudden unemployment,
theft or harassment
 Need for Microfinance - Demand
1. India’s poverty estimates range from 26% to 50%. Out of these, 87% do not have access to
credit.
2. Demand for microfinance is $30 Bn. Whereas supply is only $2.2 Bn.
3. Only 5% people in rural India has access to microfinance. Even deposit account facility is
out of reach by 70% of rural poor. Less than 15% of people have access to insurance.
4. Healthcare access is negligible.
Pillars of Microfinance in India
 Evolution of Microfinance in India
1974 – Establishment of Self-Employed Association Women's (SEWA) in Gujarat.
Sep 26, 1975 – Rural bank Ordinance was passed.
Oct 02, 1975 – Prathama bank (first RRB) came into existence.
1976 – Ordinance was replaced by Regional Rural Bank Act.
July 12, 1982 – NABARD was established on the recommendations of Shivaraman Committee, by an act of
Parliament to implement the National Bank for Agriculture and Rural Development Act 1981.
Apr 02, 1990 – SIDBI was established through Small Industries Development Bank of India Act 1989.
1992 – NABARD launched SHGs-Bank Linkage program.
1999 – SIDBI created Microcredit (SFMC) to create a national network of strong, viable and sustainable
Microfinance Institutions from the informal and formal financial sector to provide microfinance services to
the poor, especially women.
2006 – NABARD launched the Micro-Enterprise development Programme (MEDP) for skill development.
 Role of RBI,NABARD and SIDBI
• Support financial liberalization & create condition sustainable for
sector
RBI – Central • Support projects of microfinance
• Prudential regulation and supervision.
Bank • Collecting data and advocacy

• Framing policy and guidelines for rural financial Institutions

NABARD - • Providing credit facilities to issuing organizations
• Preparation of potential-linked credit plans for all districts
Regulator • Overseeing the linking programme of banks to SHGs and offers
refinance for it.

SIDBI • Lends to MFIs through SIDBI foundation for microcredit.

 Key Non-Financial
Advantages of Microfinance
Products and Services
• Increased self-employment opportunities
especially for women (Women are 1. Financial counseling and training
granted 75% of micro-credits) 2. Commercial linkages

• Micro entrepreneur’s development: Small 3. Health and education

shopkeepers, peddlers, craftsmen or 4. Business advisory services

farmers. 5. Dealing with legal barrier

• To generate Employment opportunities &

regular income.
• Encourage Women Entrepreneurship
 Industry
Structure
 The Profile of Microfinance in
India
The scenario
Estimated that 350 million people live Below Poverty Line This translates to approximately
75 million households.
Annual credit demand by the poor in the country is estimated to be about Rs. 60,000 crores.
Cumulative disbursements under all microfinance programs is only about Rs. 5000 crores.
Total outstanding of all microfinance initiatives in India estimated
to be Rs. 1600 crores.
Only about 5 % of rural poor have access to microfinance.
 Features of MFI’s
About 60 % of the MFIs are registered as societies.

About 20 % are Trusts

About 65 % of the MFIs follow the operating model of SHGs.

Large concentration in South India

600 MFI initiatives have a cumulative outreach of 1.25 crore poor households

NABARD’s bank linkage program has cumulatively reached a total of 9.4 lakh SHGs
with about 1.4 crore households.
Why Microfinance Can Change the Way the World Works
GRWOTH PERFORMANCE OF MICROFINANCE
 PROBLEMS FACED BY MICROFINANCE

 Risk of lending to the poor (the loan may be misused easily)

 High costs involved in small loan transactions
 Lack of awareness about sources
 The poor’s inability to offer marketable collateral for loans
 Difficulty in measuring the social performance of MFIs
 PROBLEMS FACED BY
MICROFINANCE
 Mixing of charity with business by microfinance providers
 High interest rates of loans made to the poor
 Lack of customized microfinance models for the poor
 Inappropriate targeting of poor
 Lack of microfinance training for MFIs
 Poor distribution system to spread out loan facilities into rural areas
 Dual mission of MFIs to be financially sustainable as well as development
oriented
Microcredit vs. Microfinance
Microcredit refers to very small loans for unsalaried borrowers
with little or no collateral, provided by legally registered institutions.
Currently, consumer credit provided to salaried workers based on
automated credit scoring is usually not included in the definition of micro
credit, although this may change.
Microfinance typically refers to microcredit, savings, insurance, money
transfers, and other financial products targeted at poor and low-income people.
 CONTENT
1.MODELS
S 2.Channels of micro finance
SHG-Bank Linkage programme
Self Help Groups (SHG)
Micro finance institution
Joint Liability Group
Credit Unions Model
Co-operative Model
Community Bank Model
Bank guarantee Model
Non-governmental Organization Model
Village Banking Model
 Self Help Group (SHGs)
A SHG is a group of 15 to 20 members
from very low income families, usually
women, which mobilises savings from
members and uses the pooled funds to give
loans to those members who need them,
with the interest rates on deposits and
loans being determined entirely by
members.
- Reserve Bank of India
 JOINT LIABILITY
GROUP
 It was formed on 24-2-14.

 Aimed to provide institutional credit to small farmers

 It is beneficial for states like Punjab and Haryana

 Informal group comprising 4-10 individuals.

 For the purpose of availing bank loan against mutual guarantee.

 JLG members to engage in similar type of economic activities either in farm and non
farm sector.

 Weekly group meetings

 One time membership fee

Difference between SHG and JLG
Community Banking
Model
Community banking model essentially treats the whole
community as one unit and establishes semi-formal or formal
institutions through which microfinance is dispensed. Such
institutions are usually formed by extensive help from non-
governmental organizations and other organizations, who
also train the community members in various financial
activities of the community bank.
 Bank Guarantee Model
1. It is used to obtain a loan
from a commercial bank.
2. It may be arranged
externally or internally.
3. Loans obtained may be
given directly to an
individual, or they may be
given to a self-formed
group.
 Credit Union Model
 Credit union are not-for-profit organization.

 Require membership eligibility.

 Serve members rather than to maximize

corporate profits.

 Accept deposits and make loans.

 Offer savings and loans at reasonable rates.

 Return surplus income to their members in the

form of dividends.

 Regulated by the NCUA a federal agency.

 Advantages and Disadvantages
Advantages:

Customers are owners

Credit unions are non-profit

Lower fees and higher saving rates

Interest rates on loans and credit are often

lower.

Disadvantages:

Limited branch locations and ATMs.

Most are insured, but not all.

Fewer services.
 Cooperative Model
A cooperative is an autonomous association
of persons united voluntarily to meet their
common economic ,social and cultural
needs and aspirations through a jointly –
owned and democratically –controlled
enterprise.
Some cooperatives include member –
financing and savings activities in their
mandate.
 Non-governmental Organization
Model
• The term non-governmental Features
organization was first used in •Function on no profit basis
1945.
•Non political character
• A non-governmental
•Clearly defined objectives
organization is a citizen-based
•Voluntary character
association that operates
independently of government. •Wide operational area

• Usually to deliver resources or •Positive contribution

serve some social purpose. •Need financial support
 Advantages and disadvantages
• Advantages
• Flexible in adapting to local needs
• Enjoy good rapport with people
• Ability to communicate at all levels
• Less restrictions from the government
• Disadvantages
• Lack of funds
• Lack of coordination
• Misuse of funds
 Village banking model
1. Village banks are community –based credit and savings association .
2. They consist of 25-50 low-income individuals who are seeking to improve their
lives through self-employment activities .
3. Initial loan capital for the village bank may come from an external source ,but the
members themselves run the bank.
4. Their loans are backed ,not by goods or property ,but by moral collateral.
5. It is widely adopted and implemented by Foundation for International Community
Assistance (FINCA)
 Channels for Microfinance
The players in the Microfinance sector can be classified as falling into three main groups:
The SHG-Bank Linkage Model
Non-Banking Finance Companies

Others including trusts, societies, etc

8%
SHG-Bank Linkage Model
NBFC
Others
34%
58%

Outstanding Loan Portfolio

Source: RBI
as on 31-Mar- 2011
• This is the Bank –led microfinance
channel which was initiated by NABARD
SBLP
in 1992 .

• Under the SHG Model the members ,

usually women in villages are
encouraged to form group of around 10-
15 .

• NGO acts as intermediary in between the

bank and the SHG.

• NGO helps the SHG members is filling up

the forms and other formalities
• NGO generally provides training to the
SHG members for 6 months.

• After 6 months the SHG members starts

working themselves.
 Micro finance institution
• MFIs are the main players in the micro finance in India.
• Their primary product is micro credit .
• It is an organization that offers financial services to low income
population .

• A great scale of organization is regarded as MF Institutes.

• There are specialized lenders called apex MFIs that provide both
loans and capacity building support to MFIs .
• This Institution lend to the concept of JLG
 MFIs for offering microfinance
are as follows
• High Transaction cost

• Absence of collaterals

• Loans are generally taken for very short duration periods

• Higher frequency of re payment of installments and higher rate

of default
 MFIs may be classified as
follows
Not –for –profit MFIs

Societies (such as Bandhan, Rastriya seva samiti and gram utthan)

Public trusts (such as Shri Kshetra Dharmasthala Rural Development

Project, and Community Development centre )

Non –profit companies (such as Indian Association for savings and

credit, and cashpor Micro credit.
 Mutual benefit
MFIs
 Cooperatives registered under state or National Acts
(such as pustikar laghu vyaparik pratisthan Bachat and
Sakh Sahkari Samiti limited)

 Mutually –aided co-operative societies(MACS: such as

Sewa mutually aided co-operative Thrift Societies
Federation Ltd)
 For –profit
MFIscompanies (NBFCs; such as Bharatiya
 Non banking financial
Samruddhi Finance Ltd.Share Micro fin ltd.SKS Microfinance
Ltd.and spandana sphoorthy financials Ltd.

 Producer companies (such as Sri vijaya vishaka milk Producers

Co Ltd .)

 Local area banks (the only such MFI is Krishna Bhima

Samruddhi Local Area Bank)
 NBFCs
• The NBFC encompasses many different types of financial companies, which are all
subject to the same regulatory requirements. Many microfinance institutions have
recently registered as NBFCs to take advantage of access to capital markets.
Microfinance institutions operating as NBFCs account for the great majority of the
microfinance market in India.
 NBFC-MFIs
• For-profit institutions that qualify for priority sector lending funds are
registered as NBFC-MFIs. This NBFC sub- category was created by RBI
in May 2011 as a way to classify NBFCs operating as microfinance
institutions which meet certain requirements. Currently, it is unclear
how many NBFCs will elect to register as NBFC- MFIs, and how many
will continue to operate as NBFCs.
A chit fund is a type of
rotating savings and credit
association system
practiced in India. Chit
fund schemes may be
organized by financial
institutions, or informally
among friends, relatives, or
neighbours.
In some variations of chit
funds, the savings are for a
specific purpose.
People used to raise money for special events like weddings,
education, house etc. We can say it BIG piggy bank.
 What are the laws governing chit
funds?
Classifying them as contracts, the Supreme Court has read chit funds as being part of the Concurrent List of the Indian
Constitution; hence both the centre and state can frame legislation regarding chit funds. States like Tamil Nadu, Andhra
Pradesh and Kerala had enacted legislation (e.g The Kerala Chitties Act, 1975 and The Tamil Nadu Chit Funds Act,
1961) for regulating chit funds.

Chit Funds Act, 1982 In 1982, the Ministry of Finance enacted the Chit Funds Act to regulate the sector. Under the Act,
the central government can choose to notify the Act in different states on different dates; if the Act is notified in a state,
then the state act would Be repealed. States are responsible for notifying rules and have the power to exempt
certain chit funds from the provisions of the Act. States may appoint a Registrar who would be responsible for
regulation, inspection and dispute settlement in the sector. Any grievances over decisions made by the Registrar
can be subject to appeals directed to the state government. Chit fund managers are required to deposit the entire value
of the chit fund (can be done in 50% cash and 50% bank guarantee) with the Registrar for the duration of the chit cycle.
 What is the role of RBI and
SEBI?
The Reserve Bank of India (RBI) is the regulator for banks and other non banking financial companies
(NBFCs) but does not regulate the chit fund business. While chit funds accept deposits, the term
‘deposit’ as defined under the Reserve Bank of India Act, 1934 does not include subscriptions to chits.
However the RBI can provide guidance to state governments on regulatory aspects like creating rules or
exempting certain chit funds.
As the regulator of the securities market, SEBI regulates collective investment schemes. But
the SEBI Act, 1992 specifically excludes chit funds from their definition of collective investment
schemes. In the case with Sarada Group, the SEBI investigation discovered that Sarada were, in effect,
operating a collective investment scheme without SEBI’s approval.
 Current Scenario
These are challenging times for chit fund operators. A scam involving the Saradha
group allegedly conning customers under the guise of a chit fund, has raised serious
questions for the industry.
The scam also sparked responses from both the centre and states: the Finance
Ministry, Ministry of Corporate Affairs and SEBI all promised to act and the West Bengal
Assembly passed The West Bengal Protection of Interest of Depositors in Financial
Establishments Bill, 2013, with Odisha and Haryana considering similar legislation.
With a reported around 10,000 chit funds in the country handling over Rs 30,000
crore annually, chit fund proponents maintain that these funds are an important
financial tool.
 Saradha chit fund scam: All you want to know

HIGHLIGHTS
•The Saradha Group financial scandal is a major
financial scam and alleged political scandal caused
by the collapse of a Ponzi scheme run by Saradha
Group in , a consortium of over 200 private
companies that were believed to be running
collective investment schemes popularly but
incorrectly referred to as chit funds. Here is a look at
the details of the scam.
 The group collected around $4–6 billion from over 1.7 million
depositors before it collapsed in April 2013.
 In the aftermath of the scandal, the state government of West
Bengal, where the Saradha Group and most of its investors
were based, instituted an inquiry commission to investigate the
collapse.
 The central government through the Income Tax Department
and Enforcement Directorate launched a multi-agency probe to
investigate the Saradha scam and similar Ponzi schemes.
 In May 2014, the Supreme Court of India observed inter-state
ramifications of the scheme, possible international money
laundering, serious regulatory failures and alleged political
The CBI arrested a third TC politician, 
nexus, and, hence, transferred all investigations into the Madan Mitra, in connection with the
scam, prompting opposition parties in the
Saradha scam and other Ponzi schemes to the Central Bureau state to demand the CM’s resignation.
of Investigation (CBI).
 Many prominent personalities were arrested for their involvement in the scam including two
Members of Parliament (MP) - Kunal Ghosh and Srinjoy Bose, former West Bengal director general of
Police Rajat Majumdar, a top football club official Debabrata Sarkar, sports and transport minister in
the Mamata Banerjee cabinet– Madan Mitra.
 In February 2014, Sudipta Sen was sentenced to three years in jail for failing to deposit with the
provident fund authorities INR 0.03 million that his firm owed to its employees.
 Soon after the scam was unearthed, the West Bengal government set up a four-member judicial
enquiry headed by Shyamal Kumar Sen, retired Chief Justice of the Allahabad High Court. The
commission was named Justice Shyamal Sen Commission of Enquiry.
 The commission completed its enquiry in mid-August 2013. As many as 1.73 million depositors filed a
complaint with the commission. In its recommendations, the state government was urged to sell off
the assets of the Sardha Group.
 The chief minister also set up a Rs 500 crore package to safeguard the interest of small-time investors.
To raise the money for the package, Mamata introduced a 10% additional tax on tobacco products.
 Within days of the collapse of the scheme, the
Assam government unanimously passed the Assam
Protection of Interests of Depositors (in Financial
Establishments) (Amendment) Bill (2013) to enhance
the protections available to depositors and to curb
fraudulent financial schemes.
 As many as 6,000 investors in Odisha filed a
complaint against the Sardha Group, mainly from
areas adjoining West Bengal. The state government
launched an investigation by the Crime Branch of
the state police.
 A month after the collapse of the scheme, the
Tripura government handed over the documents of
the case to CBI.
SKS Microfinance 53
 Grameen Bank
• Grameen Bank (GB) was initiated as a challenge to the conventional banking which
had no place for the poor
• Began as the Grameen Bank Project in 1976; which was established as a Bank in
1983
• Promotes Credit as a Human Right
• Grameen Bank gives collateral-free loans. Provides loans and financial services
without any legally enforceable contact
• Preference for giving loans to women
• Provides services at the door-step of the poor
• Owned by the poor borrowers
 Grameen Bank – Contd.

Some Key Points related to GB:

• Loans can be received in a continuous sequence
• All loans are to be paid back in regular installments
• More than one loan can be received simultaneously
• Has both compulsory and voluntary savings
• Replicated in more than 100 countries around the world

SKS Microfinance 55
Professor Yunus and Ms. Taslima Begum with
Nobel Peace Prize, 2006
(efforts in Economic & Social Development)

SKS Microfinance 56
 Case Overview
• Microfinance is an effective tool that can help reduce poverty and spread economic opportunity
by giving poor people access to financial services, such as credit and insurance. SKS distributes
small loans that begin at Rs. 2,000 to Rs. 12,000 (about $44-$260) to poor women so they can start
and expand simple businesses and increase their incomes.
• SKS uses the group lending model
• Borrowers undergo financial literacy training and must pass a test before they are allowed to take
out loans.
• Weekly meetings with borrowers follow a highly disciplined approach.
• Re-payment rates on our collateral-free loans are more than 99% because of this systematic
process.
 Organization
Founder and CEO of SKS Microfinance
PhD from University of Chicago, BA from Tufts University
Management Consultant with Mckinsey prior to SKS

Vikram Akula
COO of SKS Microfinance
Head- Alternate Channel ING Vysya Life Insurance2004 – 2006 (2
years)
AVP 1992 – 1995 (3 years)
Esanda FinANZ, a subsidiary of ANZ Grindlays Bank plc
Prior to this he worked with American Express and Standard Chartered
M R Rao Bank

CFO of SKS Microfinance

Jennifer Leonard
1 year with NGO, 4 years in equity research with Merril Lynch

SKS Microfinance 58
 Snapshot of SKS Microfinance
3 C’s
Lack of capital
Capacity constraints
High cost of delivering microloans

Lack of trust in SKS and on Vikram Akula

Resulted in volunteer-run foundation “the Indian
Development Service”
Managed to raise start-up capital $52000 to found SKS
as NGO
Need of Highly efficient service delivery model

SKS grew at an impressive rate

Borrower base expanded by 200%-300%
By 2007,
• SKS became 3rd largest MFI
• 380000 members
• Portfolio of Rs 175cr
• Expanded to 11 states
SKS Microfinance
Loan Portfolio 59
Fragmented structure
 SKS Approach
• SKS Microfinance follows the Joint Liability group Model. The methodology involves lending to

individual women, utilizing five member groups where groups serve as the ultimate guarantor for each

member.

• SKS follows a clear process in its operations

– Village selection

– Projection meeting

– Group Formation

– Compulsory Group Training

– Centre Meetings
 MFI Operating Income
Operating Income = Interest rates higher as compared to the
Income generated through interests from banks
loan products • Labor intensive business
- Salaries - Benefits - Other Costs • Weekly loan officer visits
- Provisions
• Extensive traveling
• Low ticket size
• Poor Infrastructure

Higher interest rates of around 23.6% to How did SKS reduce cost?
28.1%
Reduced manual processing errors
and confusion from
variance in process by
installing Portfolio
But this customer segment would not get
loans from bank and even if they got it the Tracker
cost of commute to & fro was high The system captured all the data
and tracked delivery
SKS was nicknamed “Starbucks of Indiaof loans
SKS Microfinance 61
 Client
• Typical customer – Rural, poor woman, Market Sizing
earning less than $1-$2 a day
– Estimated market size Rs
• Potential market size for this profile – 150
M households
4.5 Trillion
• Estimated Credit Demand – Rs 30K – Even if probabilities are
• Occupations they were typically involved in
taken into account market
– Production, blanket weaving, candle making,
size is Rs 200 Billion
flour grinding etc – Current penetration is less
than 6%

The SKS way

What all does the customer do to get a loan? Why loans only to Women?
• Lesser risk
•Bears the transaction cost
•Uses up saving to make initial payments • More cooperative
•Attend 5 one-hour training • Likely to re-invest
•Attend weekly centre meetings • Positive impact

SKS Microfinance 62
 The Structure
• Conducted meetings in the day time
• Recruited new clients in the night
• Served 330 clients each

Each Branch had a cashier, 5-7 loan

officers and a branch manager

Each unit had 6 or so branches under it

5 or so units formed an area

At maturity an area was projected to have 30 branches, 135 thousand customers, a portfolio
of $20 Million, and an annual revenue of approximately $10 Million
SKS Microfinance 63
 Malegam Recommendation - RBI Guidelines
• Based on the recommendations of the Malegam Committee, RBI introduced a new category
for MFIs, known as Non Banking Financial Company-Micro Finance Institutions (NBFC-MFIs)

The criteria for classifying an NBFC as an NBFC- MFI is:

• Minimum net owned funds of Rs. 5 crore.
• Not less than 85% of its net assets are ‘qualifying assets’.
• The income an NBFC-MFI derives from the remaining 15% of assets shall be in accordance with
the regulations specified in this regard.
• An NBFC, which does not qualify as an NBFC-MFI shall not extend loans to the microfinance
sector, which in aggregate exceed 10% of its total assets.

SKS Microfinance 64
 Malegam Recommendation
Qualifying asset’ shall mean a loan, which satisfies the following criteria:
•Loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding Rs.
60,000 or urban and semi-urban household income not exceeding Rs. 1,20,000.
•Loan amount does not exceed Rs. 35,000 in the first cycle and Rs. 50,000 in subsequent cycles.

•Total indebtedness of the borrower does not exceed Rs. 50,000.

•Tenure of the loan not to be less than 24 months for loan amount in excess of Rs. 15,000 with
prepayment without penalty.
•Loan to be extended without collateral.

•Aggregate amount of loans, given for income generation, is not less than 75 % of the total loans given by
the MFIs.
•Loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower.

SKS Microfinance 65
 Why does SKS require Capital?

• Growing number of borrowers and branches and to finance its ambitious expansion plans
• SKS depended on interest from loans given for operating income. So, not possible to give loans
to new borrowers from this income
• Not allowed to take deposits from general public
• Increased demand from commercial bank, therefore wanted to achieve first mover advantage
• Maintenance of capital adequacy ratio of 9%
• Very high debt equity ratio would increase distress costs and was very risky. So, could not
depend very much on debt and needed equity

SKS Microfinance 66
 SKS Microfinance: The company that got too big
Silver Lining
• Completed a Rs 230 Crore QIP at
share price of Rs 75.4 Deutsche
Sec buys 9.15% stake
• Will help in restarting lending

Challenges
Changed Customer Perception
Regulatory environment not
favorable

Dark Times
•  Andhra Pradesh Microfinance (Regulation of Moneylending) Act 2010
• Suresh Gurumani – Quit after the IPO
• Vikram Akula – Was shown the exit door
 SKS Microfinance employees embezzle Rs 15.8 cr

• Auditors of the company have reported that
there was cash embezzlement by the employees
to the tune of Rs 2.5 crores and loans given to
non-existent borrowers was Rs 13.3 crores
• Employee fraud is an inherent risk in the business
Initiatives taken by SKS to prevent this
Indemnity bond from every field staff Personal
guarantee of a third person Every Bank transaction
requires two associates Fidelity Insurance Strong box
controlled by two keys

SKS Microfinance soars on hopes RBI will ease bad loan norms

• Provisioning Norms for bad-loans to be relaxed In 2011 RBI mandated that MFI’s make 100% provisioning
• Asset Classification guidelines have been pushed for loans overdue for a period of more than 180 days
MFI based out of AP are facing tough times

Source: The Hindu & The Economic Times

SKS Microfinance 68
 Top 5 Current Players and Leaders in MFI Industry

 SKS Microfinance Ltd (SKSMPL) {HQ – Secunderabad (AP); Loan Outstd. 18227 mn}

 Spandana Sphoorty Financial Ltd (SSFL) {HQ – Hyderabad (AP); Loan Outstd. 18227 mn}

 Share Microfin Limited (SML) {HQ – Hyderabad (AP); Loan Outstd. 8568 mn}

 Asmitha Microfin Ltd (AML) {HQ – Hyderabad (AP); Loan Outstd. 4944 mn}

 Shri Kshetra Dharmasthala Rural Development Project (SKDRDP) {HQ – Dharmasthala

(Kar); Loan Outstd. 4050 mn}

(as per Crisil analysis)

SKS Microfinance 69
 Value chain finance refers to:
 financial products and services

 that flow to or through any point in a value chain

 in order to increase returns on investment, growth and competitiveness of that value chain.
Source image: KIT – Value Chain Finance – adapted by FSAS
Reasons for existence of the Missing Middle & Challenges in Rural
Micro Finance

-Perceived risk (agriculture – start-ups)

-No collateral

-No solid equity base

-Lack of (long term) trade relationships

-High transaction costs

-Product characteristics do not meet demand characteristics

-Subsidized financial services

Examples of Specific Adapted
VCF Products
Trade Finance (Purchase Order
loan)
Examples of Specific Adapted VCF
Products

Warehouse Receipt
Systems & Leasing
 Examples of Specific Adapted VCF

Coop as inter-
mediate for MFI
lending to individual
farmers
ROLE OF MICRO FINANCE IN
RURAL DEVELOPMENT
 FEATURE
S
 PREFER WOMEN CUSTOMERS OVER MEN

 PROVIDES TINY LOANS FOR SHORT TERMS

 PREFER SAVING OVER BORROWING

 PROVIDES FINANCIAL SERVICES TO RURAL AREA

 LOANS ARE OFFERED WITHOUT COLLATERAL

 LOANS ARE GENERALLY TAKEN FOR INCOME

 Problems in rural area
 Education
 ELECTRICITY
 Jobs
 Roads
 Scope for development
 Illiterate
administration
 No modern facilities
 Discrimination
ROLE OF MICROFINANCE IN RURAL
DEVELOPMENT
1. POVERTY REDUCTION
2. WOMEN EMPOWERMENT
3. CREDIT TO RURAL POOR
4. MOBILIZATION OF RESOURCES
5. PROMOTES SAVINGS AND BANKING HABIT
6. ECONOMIC GROWTH
7. SOCIAL AND ECONOMIC JUSTICE
 POVERTY REDUCTION
IMPROVED ACCESS AND EFFICIENT PROVISION OF
SAVINGS, CREDIT,AND INSURANCE FACILITES IN
PARTICULAR CAN ENABLE THE POOR TO SMOTH
THEIR CONSUMPTION.
GOVERNMENT, NGOs AND OTHER FINANCIAL
INSTITUTIONS HAVE INTRODUCE TO REDUCE
POVERTY.
MICROFINANCE BY PROVIDIND SMALL LOANS AND
SAVINGS FACILITIES TO THOSE WHO ARE EXCLUDED
FROM COMMERCIALFINANCIAL SERVICES HAS BEEN
DEVELOPED AS A KEY STRATERGY FOR REDUCING
POVERTY THROUGHTOUT THE WORLD.
 WOMEN EMPOWERMENT
IN RURAL AREAS WOMEN LIVING BELOW THE POVERTY
LINE ARE UNABLE TO REALIZE THEIR POTENTIAL.

MICROFINANCE PROGRAMMES ARE CURRENTLY BEING

PROMOTED AS A KEY STRATERGY FOR
SIMULTANEOUSLY ADDRESING BOTH POVERTY
ALLEVIATION AND WOMEN’S EMPOWERMENT.

THE SELF HELP GROUPS(SHGs)OF WOMEN AS SOURCE

OF MICROFINANCE HAVE HELPED THEM TO TAKE PART
IN DEVELOPMENT ACTIVITIES.
CREDIT TO RURAL AREA
CREDIT IS AN IMPORTANT INSTRUMENT FOR RURAL DEVELOPMENT.MOST OF THE
AGRICULTURE CHORES STILL DEPEND ON MANUAL LABOUR.
THE INVESTMENT IN RURAL AREAS HAS BEEN ON A LOW WHICH EFFECTIVELY RESULTS IN LOW
OUTPUT AND PRODUCTIVITY IN ALL KINDSOF ACTIVITIES.
A CAPITAL INFUSION FOR A JUMP IN PRODUCTIVITY IN REFERENCE TO BOTH AGRICULTURAL
AND NON- AGRICULTURAL ACTIVITIES CAN BE ACHIEVED BY REFORMING CREDIT AND BAKING
SYSTEM.DURING THE GESTATION PERIOD BETWEEN SOWING AND HARVESTING SEASONS,
FARMERS NEEDS CREDIT TO MAKE ENDS MEET, THERE GENERAL NEEDS ETC ADDITIONALLY,
THEY ALSO NEEDS CREDIT TO VENTURE INTO MODERN AGRICULTURAL TECHNIQUES,TO BUY
CATTLE,LAND ETC.
 MOBILIZATION OF
RESOURCES
MOBILIZATION OF RESOURCES MEANS
PLAN A PROPER UTILIZATION OF RURAL
AREA RESOURCES LIKE- LAND, LABOUR
,MACHINES, MONEY ETC.
SO THAT THEY CAN BE UTILZED
PROPERLY AND IN EFFICIENT MANNER
AS RESOURCES ARE SCARRRED .
 PRMOTES SAVIND AND BANKING
HABITS
1. INTEREST GIVEN
2. IMPROVENT IN LIFESTYLE
3. TAX SAVING
4. EASY AVAILABILITY OF LOAN
5. TAKE BENEFITS OF
GOVERNMENT SCHEMES
6. SAFETY FROM FRAUDS
ECONOMIC GROWTH
• DUE TO EASY AVAILABILITY OF
•FINANCE
LOW INTEREST RATES
•PROPER UTILIZATION OF RESOURCES
•WOMEN EMPOWERMENT
•EXPEND OF SMALL BUSINESS
•INCREASE IN PERSONAL INCOME
•IMPROVENT IN INDIVIDUAL LIFE STYLE
 SOCIAL JUSTICE

• BY PROVIDING EQUAL RIGHTS TO

• WOMEN
• BY OPENING BANKS IN RURAL AREAS
• PROVIDE LOAN TO SMALL
• BUSINESSMAN IN RURAL AREA
• PROVIDES ALL TYPES OF SERVICES
COMMERCIALBANKS &
FOUNDATIONS &
INVESTMENT FUNDS
DONORS
( incl . enterprises)

MECHANISMS
MICROFINANCE INSTI
TUTIONS(MFIs)
(NGO,ASSOCIATION &
BANKS)

GOVERNMENT & Support

LOCAL BOADIES Organizations (e.g.
PF)
 MICROFINANCE FAMILY FINANCIAL
PRODUCTS GOALS

ACCIDENT COST, HEALTH CARE,

INSURANCE PLANS REPLACEMENT COST AFTER
FLOODS etc.

RETIREMENT, FARM EQUIPMENTS,

PENSION PLANS OR WELLS, HOME UPGRADATION etc.
LONG TERM DEPOSIT

IRRIGATION, TRANSPORTATION,
MEDIUM TERM DEPOSIT LIVESTOCK, EDUCATION, etc.

SEWING MACHINES, BIKES,

SHORT TERM LOAN LIVESTOCK, RADIOS, etc.

HOUSING, WELLS, IRRIGATION

LONG TERM LOANS SYSTEM, BOATS etc.
What is the Shadow Banking System?
A shadow banking system is the group of
financial intermediaries facilitating the
creation of credit across the global financial
system but whose members are not subject
to regulatory oversight. The shadow
banking system also refers to unregulated
activities by regulated institutions.
Examples of intermediaries not subject to
regulation include hedge funds, unlisted
derivatives, and other unlisted instruments,
while examples of unregulated activities by
regulated institutions include credit default
swaps.
Understanding Shadow Banking Systems
The shadow banking system has escaped regulation primarily because unlike traditional banks and
credit unions, these institutions do not accept traditional deposits. Shadow banking institutions arose as
innovators in financial markets who were able to finance lending for real estate and other purposes but
who did not face the normal regulatory oversight and rules regarding capital reserves and liquidity that
are required of traditional lenders in order to help prevent bank failures, runs on banks, and financial
crises.
As a result, many of the institutions and instruments have been able to pursue higher market, credit,
and liquidity risks in their lending and do not have capital requirements commensurate with those risks.
Many shadow banking institutions were heavily involved in lending related to the boom in subprime
mortgage lending and loan securitization in the early 2000’s. Subsequent to the subprime meltdown in
2008, the activities of the shadow banking system came under increasing scrutiny due to their role in
the over-extension of credit and systemic risk in the financial system and the resulting financial crisis.
The Breadth of the Shadow Banking System
Shadow banking is a blanket term to describe financial activities that take place among non-
bank financial institutions outside the scope of federal regulators. These include investment
banks, mortgage lenders, money market funds, insurance companies, hedge funds, private
equity funds and payday lenders, all of which are a significant and growing source of credit in
the economy.
Who Is Watching the Shadow Banks?
The shadow banking industry plays a critical role in meeting rising credit demand in the
United States. Although it's been argued that shadow banking's disintermediation can
increase economic efficiency, its operation outside of traditional banking regulations raises
concerns over the systemic risk it may pose to the financial system.
KEY TAKEAWAYS
The shadow banking system consists of lenders, brokers, and other credit
intermediaries who fall outside the realm of traditional regulated banking.
It is generally unregulated and not subject to the same kinds of risk, liquidity,
and capital restrictions as traditional banks are.
The shadow banking system played a major role in the expansion of housing
credit in the run up to the 2008 financial crisis, but has grown in size and largely
escaped government oversight even since then.
Thank you