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1. Microfinance An Introduction Kabare Piyush Madhukar M.B.B.S(Mumbai), PGPM (Indian Institute of Manaement, Indore) AssistantManaer, !idarbha "#uster In$"hare Microfinance, %&'$%& *+ &inanceimited 2. Inde (1-) Introduction / 0hat is Microfinance / 'efinitionIndustry Preie2 / G#oba# 'ee#o3ments in Microfinance / Ma4or"hanes in Microfinance Scenario in South 5ast Asia / 'ee#o3mentsin Microfinance in India / Pi##ars of Microfinance in IndiaMicrofinance Industry Structure / %o#e of %BI ("entra# Bank) and6ABA%' (%eu#ator) / Ma4or P#ayers in the Industry / &inancin

Mode# ada3ted by Banks in Microfinance Industry / Microfinance'e#iery Mode# Microfinance endin Process / "#ient "haracteristicMicrofinance Serices / endin Process in Microfinance BusinessStratey / Business Strateies of Microfinance Institutions /Business Strateies of Priate Banks-"ommercia# Banks / Gro2th'riers for Sector 3. Inde (-) Key "ha##enes / 7ih +ransaction and Serice "ost/ "redit %isk / 8ther %isks %ecommendations / %eu#ations andPo#icies / 83erationa# Im3roement &uture 8ut#ook / &uture Gro2th8ut#ook / 5ntry of 6e2 P#ayers / Sustainabi#ity of Microfinance /%o#e of Priate Sector Inestment S3ecia# Issues / %easons for&ai#ure to fu#fi## the desired ob4ectie / rban Microfinance /

%atin of Microfinance Institutions Anneure / Abbreiations /%eferences 4. 0hat is Microfinance 'efinition I6+%8'"+I86

9. Introduction: 0hat is Microfinance; +he scenario of su33#y offorma# financia# Access to financia# serices are serices 2ithinIndia constraint for the 3oor and not interest rates. +he 3oor cansae and can indeed use a An estimated demand for credit ranin from2ide rane of financia# serices.

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forma# sector is bare#y ab#e to 3roide @, the Grameen been du3#icated in Bo#iia, Bank has ro2n to

inc#ude "hi#e, "hina, 5thio3ia, Microfinance has s3read more than 9.9mi##ion 7onduras, India, Ma#aysia, to coer fie continents members2ith more than Ma#i, Phi#i33ines, Sri and numerous countries. S

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credit. / Serices offered are "redit faci#ity, Sain accounts,Money transfers, %emittances, Insurance and een Inestment. +heemerence of 3rofit$makin Microfinance Institution (M&Is). /"urrent#y, 3rofitab#e M&Is are 3resent in most countries re3ortinhue returns on assets (%8As) and returns on euity (%85s) incom3arison to conentiona# bankin institutions. / +he M&Is in South

Asia hae reached 3rofitabi#ity throuh cost efficiency 2hi#e thosein 5ast Asia seem to hae re#ied more on re#atie#y hih interestrates. 5merence of "ommercia# Microfinance / Sma## core rou3 ofhih#y commercia# and 3rofessiona#, market$oriented institutions haeemered but not yet become fu##y interated into the broadermainstream commercia# financia# systems. South Asia has a#sodistinuished itse#f by forin successfu# 3artnershi3s formicrofinance bet2een oernments, 6G8s, cii# society, 3riatesector, and communities. 1?. 'ee#o3ments in Microfinance C India Micro finance in Indiahas started to eo#e in ear#y 1>E?s 2ith an effort of formininforma# Sma## 7e#3 Grou3 (S7G) to 3roide access of financia#

serices to needy. India is nd most 3o3u#ous country behind "hina2ith a #are number of un$financed 3oor 3eo3#e $ Main c#ients forM&Is M&Is are estimated to hae .>J mi##ion borro2ers as of March??E 2ith "AG% of EE.J oer the #ast fie years and cumu#atieoutstandin #oan 3ortfo#io of S

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financia# resources as credit * euity and enhancin techno#oy kno2$ho2 of M&Is 1. %o#e of %BI ("entra# Bank) and 6ABA%' (%eu#ator) Ma4orP#ayers in the Industry &inancin Mode# ada3ted by Banks inMicrofinance Industry Microfinance 'e#iery Mode# MI"%8&I6A6"5I6'S+%D S+%"+%5 1=. %o#e of %BI ("entra# Bank) and 6ABA%' (%eu#ator) / Su33ortfinancia# #ibera#iFation * create conditions sustainab#e for Sector%o#e of %BI / Prudentia# reu#ation and su3erision ("entra# /Su33ortin the 3i#ot 3ro4ects of microfinance Banks) / "o##ectindata and 3ub#ication / +rainin and adocacy / &ramin 3o#icy anduide#ines for rura# financia# institutions %o#e of +he / Proidincredit faci#ities to issuin oraniFations 6ABA%' / Pre3aration of3otentia#$#inked credit 3#ans annua##y for a## districts for(%eu#ator) identification of credit 3otentia# / Monitorin the f#o2of round #ee# rura# credit 'iision of %es3onsibi#ity inMicrofinance 6ABA%' SI'BI 8ersees the #inkin 3roramme of banks toends to M&Is throuh SI'BI &oundation for S7Gs and offers refinancefor it micro$credit. 1J. Ma4or P#ayers in the %ura# &inance Market Pub#ic Sector Banks%eiona# Priate Banks %ura# Banks Priate &undin %ura# Schedu#e"ommercia# Institution Banks Market P#ayers "oo3eratie 6G8 BanksM&Is S7G 19. Microfinance 'e#iery Mode# Se#f 7e#3 Grou3s M&I-Grameen ea#&orms of M&Is / 7ome ro2n, co$ %e3#ica / 6G8 M&Is (Societieso3eratie / Grou3 endin and %eistration Act, 1E@? or / Sainsbased - #ed %eimented Proincia# Acts and-or / Meetin dierseneeds / &ocused on se#f$ Indian +rust Act, 1EE) / Promoted by6ABA%', sufficiency / 6on$3rofit "om3anies PS Banks, 6G8s / 6G8$

M&I and 6B&"$ (Section 9 of the / Performance Cmied M&I "om3aniesAct, 1>9@) / Pace of ro2th $ cause / &inancia# "or3orations $ forconcern S3ecia#iFed entities focusin on s3ecific sements #ikeS"-S+, Minorities Grameen II 0ho#esome / Mutua##y Aided "reditSociety (MA"S) $ / Indiidua# #endin Microfinance community o2ned *$ / 6B&"$M&I Serices 3o3u#ar in Andhra Pradesh / "oo3eratie M&Is/ Proressie oan / %eu#ation ("oo3eratie Societies Acts focusedon / S3ecia#iFed actiities of the State * "entra# enter3rise /"ost is ma4or factor Goernments) / &uture of / 'istant dream /6on$Bankin &inancia# Microfinance "om3anies (6B&"s) (Indian"om3anies Act, 1>9@, %BI Act, 1>=J) 1@. &inancin Mode# ada3ted by Banks in Microfinance Industry Bank

"#ient "redit 6G8 (&aci#itator) Promotion * +rainin S7G "#ientMember 'irect &inancin Mode# S7G$Bank inkae Mode# / Most M&Is userou3s as intermediaries / 6G8 to act as faci#itator-financia# forfinancia# transactions, but there are intermediaries bet2een bank andS7G to different 2ays of 2orkin 2ith rou3s. initiate micro sainsthrouh an account / +he 6G8 3romotes, im3arts trainin, / +heintermediation cost cou#d be around forms rou3s and a#so iescredit to @ of the #oan amount. them. / %isk #ies 2ith the banks asadances to / nder this mode# either S7Gs are formed the S7Gs are

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ref#ected in bank 3ortfo#ios. by banks or by 6G8s and forma# aencies/ Banks bear risk as it ino#e a #ot of but are financed by banks.transaction costs. 1. "#ient "haracteristic Microfinance Serices endin Process inMicro$&inance MI"%8&I6A6"5 56'I6G P%8"5SS 1E. "#ient "haracteristic Microfinance Serices Actiity %o5 %oI"6et Annua# "#assification of Actiities $ %eturn in S< Micro$creditoan +rade !eetab#e !endin 9? 9 1J= +rade Production ie StockGenera# Store 1J > 1JJ Serice Aricu#ture 8ther S2eet Makin Sho31J9 1J 1?1? Ice "ream Makin 1= > =?9 = @ Aricu#ture easinmano trees 1EJ 1E9 911 == easin irriated farm #and 1@? 1@1 @@9 Serices 83eratin a our Mi## 9 9> J?> +ai#orin 11 1= =?1? = %oadside Micro$diner J9 J@ 19E iestock Goat rearin 9E@9 J? Buffa#o rearin @> J J@ Production Pottery =9 =@ 9?Microfinance c#ients are 3oor 2ith Actiities in rura# areas arefarmin, food 3rocessin, 3etty trade, re#atie#y stab#e source ofincome. #iestock, endin, and 3roduction #ike basket 2eain."#ients of microfinance are ec#uded by Actiities in urban areas aresho3s, serices, artisans, street forma# financia# institutions.endors * ne2 ae businesses (beauty 3ar#or to 3hotora3hy). 0omenmake u3 the ast ma4ority of Ma4ority of the 3o3u#ation borro2 fortradin, 2orkin ca3ita# borro2ers, es3ecia##y in Asia (>>).reuirements for eistin business or for settin u3 ne2 one. 1>. endin Process in Micro$&inance Geo$5conomic / Based on theeo$economic information about his reion (ty3ica##y a district orSurey of %eion manda#) and arious to2ns and i##aes, M&I a33roachfaorab#e i##aes. / +hen M&I isits the i##ae *tries to atherfirst hand information about the 3o3u#ation !i##ae A33raisa# of thati##ae, their re#iion, cast, ty3e of trades, ski##s, financia#

states, their needs. / "onducts a surey to ea#uate 3otentia#ityfor the o3erations in the i##ae, some key Se#ection of !i##ae3arameters are tota# 3o3u#ation, 3oerty #ee#, accessibi#ity,3o#itica# stabi#ity * safety. / After se#ection of i##ae,interested 2omen form se#f se#ected four to si member Grou3&ormation rou3s to sere as uarantors for each other. +his 3rocessis ca##ed Grou3 &ormation. / 0hen formed rou3 meets the minimumreuirements, it beins "om3u#sory Grou3 +rainin of +rainin 3roramdesined to educate c#ients on the 3rocesses and 3rocedures ofBorro2ers microfinance #oans and bui#d a cu#ture of creditdisci3#ine. Scrutiny and / "ustomer detai#s, their business andtheir earnin ca3acity are scrutiniFed and 4uded nder2ritin toaccess re3ayin ca3acity. &inancia# / "o##ection meetins are he#don a 2eek#y-month#y basis by &ie#d Assistants to conduct +ransactionsa## financia# transactions. In addition, c#ients use the 2eek#ymeetins to discuss ne2 #oan a33#ications, #oan uti#iFation andcommunity issues. 6ear Mandatory / Insurance 3roducts are so#d tocoer death, accident or hea#th of rou3 member, Insurance memberss3ouse and-or chi#dren. ?. Business Strateies of Microfinance Institutions BusinessStrateies of Priate Banks-"ommercia# Banks Gro2th 'riers for

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Sector BSI65SS S+%A+5GD 1. Business Stratey of Microfinance Institutions Socia# Sericesand Initiaties: Inc#ude +echno#oy: +o Inestment in nutrition,eerain &inance: +he oercome its transaction hea#th, education,and 6G8 #eeraes #ie#ihood costs, increase the s3eed ocationa#trainin, inestments by #inkin of transaction, reduce Aricu#tura#and Business the rura# 3oor to redundancies and dee#o3ment serices.oernment 3rorams better contro# and banks. mechanism. 7uman%esource earnin Best Practices "a3acity Bui#din: from the Business2orksho3s, s3ecia# 0or#d: ike standardiFed 3rorams, trainins anddistribution 3rocess e3osure isits of the used by Mc'ona#d staffand c#ients. Geora3hica# 53ansion Business "om3#ete Bouuet of and!ertica# 53ansion: Increasin the indiidua# Stratey &inancia#Serices: #ike Sains, "redit , #oan 3ortfo#io by of M&Is Insurancefor the #ies 3roidin Micro and #ie#ihoods of the 5nter3rise oan,bier 3oor, Infrastructure than HG #oans. finance . Business Strateies of Priate Banks-"ommercia# Banks / M&Isidentify, train * 3romote microfinance c#ients. Bank financesPartnershi3 Mode# c#ients direct#y on the recommendation of the M&I."ustomer and 3ortfo#io resides in the banks book. / Bank buys out3ortfo#ios from M&Is. M&I continues to serice the Securitisation ofc#ients and acts as the co##ection aent. M&I shares the credit riskPortfo#ios of M&Is 2ith the bank. / Ado3tin a "ore Bankin Systemfor manain the #oan 3ortfo#io +echno#oy enerated under the3artnershi3 mode#. "redit to / A 2ho#esa#e #inkae mode# 2hichim3#ies etendin a bu#k #oan to M&Is-6G8s the M&Is for #endin to3oor 2omen Systems and oan / Actie ino#ement in 3roidinmentorin serices to c#ients, Portfo#io 5a#uation inc#udin in theareas of oernance and credit disci3#ine. iaisons 2ith the /83eratin diisions at reiona# and branch #ee# are in c#ose 6G8sconnection 2ith 6G8s in #oca# area to take the moement ahead. 7ihtransaction cost, 3oor reach and unaai#abi#ity ua#ity man3o2er, hasob#ied Banks to ada3t arious a33roaches throuh Microfinance tofu#fi## 3riority sector #endin norms =. Gro2th 'riers for Sector / ack of #endin from Banks due to#ack of co##atera# and e3#oitation from 6eed for "redit by money#enders has eem3#ified the 3otentia# demand for microfinancen3rii#eed "#ass serices and the ro2th 3ros3ects of the industry./ +hese inc#ude commercia# debt and euity, form of rants anddonations Increase in the and P5 inc#udin !" fundin. +his haschaned ca3ita# structure of this sources of finance industry forbetter / Innoation in diersifyin #ender base, conso#idatininterna# contro# systems Innoation and strenthen 3o#icies on humanresources, disc#osure, and oranisationa# 3rocesses. GoernmentPo#icy / Microfinance Bi## * 3ro3osed reu#ator 6ABA%' 2i## reu#ate* 3romote and Su33ort ro2th of this sector in #ine 2ith im3ortanceattached by oernment to this sector. "onso#idation in the /Increase in the number of 3artners in the commercia# s3ace 2i##enab#e Industry them to introduce ne2 3roducts in insurance,remittance etc. Gro2in Miration / 7iher aerae #oan siFe and

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reater use of techno#oy such as smart cards and rbaniFation and3oint$of$sa#e deices 2ith 2ire#ess connectiity. in the urban areas2i## increase urban micro$financin. 7uman %esource / Microfinanceis attractin hih ua#ity, ta#ented manaers. Peo3#e 2ith ski##s"a3acities in s3ecia#iFed 7% needs such as #oca# recruitments andcu#tura# and #inuistic interation StandardiFin the o3eratin

3rocess and systems J. 7ih +ransaction and Serice "ost "redit %isk 8ther %isks K5D"7A56G5S 9. 7ih +ransaction and Serice "ost %easons / Aeraemicrofinance #oan siFe is sma##, hence the transaction cost on a3ercentae basis for a microfinance #oan is hiher. / endin #aresiFe #oan may reuire ea#uatin the c#ient, aain increasin cost+he most 3o3u#ar form of #endin in / !ery hih o3erationa# costs,es3ecia##y at India is HG mode# 2hich incurs #oan oriination *durin monitorin is 3ecu#iar costs such as rou3 formation becauseof doorste3 serice and #itt#e or no costs, cost of trainin theborro2ers de3#oyment of techno#oy so#utions. 2ith res3ect to the3rocedures to be / Intense monitorin and re3eated fo##o2ed, hiherderee of interaction. su3erision, as 2e## as hiher / Increasedcom3etition 2i## #ead to better freuency of insta##ment 3ayments.ua#ity in serices, #o2er #oan siFes, #o2er M&Is face the cha##eneof findin rate of interests, diersification of 3roducts and use oftechno#oy as 2e## to reduce the 2ays to reduce #endin costs.transaction cost and cost of #endin. +echno#oy innoation, im3roedrura# infrastructure, borro2er education and urban microfinance arefe2 2ays to mitiate hih transaction cost @. "redit %isk Irreu#ar o2 of / Seasona#ity of aricu#tura#actiities * uniue reuirements of Income due to financin such

actiities (3ayback of #oans can on#y take 3#ace Seasona#ity after3roduction) / +raditiona# farmin 3ractices, heay de3endence onmonsoon, 7ih 'e3endence on heay de3endence on the seasona# income,makin it difficu#t to Monsoon assess borro2ers re3ayment ca3acity.ncertainty of / %isk arises because of the nature of uncertaintyino#ed 2ith Market "onditions aricu#tura# out3ut L in terms ofyie#d and 3rice. ack of Ski##s #eadin / 'ue to #ack of 3ro3ereducation and ocationa# ski##s, their to n$em3#oyabi#ityem3#oyabi#ity in non$farmin 4obs is ery #o2. ack of +anib#e /Absence of #and deed, no records #ike I+ returns irreu#ar f#o2 ofProof for Assessment income due to seasona#ity constitutes #ack oftanib#e income of Income 3roof. 6eed for Information / Adersese#ection, oer$indebtedness of c#ients and mora# haFard Sharin *Better due to ack of information about credit$2orthiness of3otentia# +echno#oy c#ients. . 8ther %isks 83erationa# %isk / Inadeuate or fai#ed interna#3rocess due to 3eo3#e, system or eterna# eents. / %ura# 3eo3#e donot hae credit history backround. Business Promotion / M&Is needski##s in business manaement, such as marketin , finance and 7%. /'e#iery of these ski##s is 3endin issue for most of them iteracy *Ski## ee#s of "#iente#e / o2 #ee#s of #iteracy, re#atie#y

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undiersified economies, hih de3endence on aricu#ture / %ura#economic actiities hae #o2 3rofitabi#ity and 3rone to hih risk'iersion of &unds to n3roductie Actiities / se of #oans forun3roductie actiities instead of 3ur3ose stated to the #ender / Itis ery difficu#t to assess 2here he-she is oin to uti#iFe themoney. %eu#atory Issues / Sti## unreu#ated and not su3erised by

any dedicated body. / M&Is are ro2in fast * they reuirereu#atory authority to faci#itate the ro2th. E. %eu#ations and Po#icies 83erationa# Im3roement%5"8MM56'A+I86S >. %eu#ations and Po#icies / 'efinition of M&I: 5ncom3ass anda##o2 M&Is to sere 3oor not on#y as #ender but as fu## financia#serice 3roider 2ithout increasin risk for 3oor customer and M&Iitse#f. / %econition of M&I as s3ecia#iFed actiity on 3ar 2ith#easin or housin finance and creation of a s3ecia#iFed cateory of6B&" NAmendment to the %BI ActO / 5asin of entry norms for #oanson#y com3aniesQ. As these com3anies 2i## not acce3t sains or offerfinancia# serices, they carry #ess risk of defau#t (6eed a %BInotification) / Mechanism to raduate to Microcredit R Serice bya##o2 for #imited and #addered 3roisions for stron com3anies tomor3h into bank. (Ma4or 3o#icy * #ea# chane) / 5nsure thatcommercia# actiities #ike microfinance are carried out in commercia#forms of oraniFations 2hen they reach sca#e. +rusts-Societies arenot desined to do so. / M&I can be best reu#ated on suriousQinterest and ethica# 3ractices by un#eashin co$ o3eratie and thebankin sector to 3roide effectie com3etition. / State shou#d notinterfere in the commerce of the sector by offerin oan 2aiers orbad 3o#icy interentions #ike Interest rate ca3s (een informa#ca3s). =?. 83erationa# Im3roement &ocus on rban Microfinance %ura#Infrastructure / 7ih customer density #eads to decrease / 8fferfinancia# serices 2ith a su3erior transaction cost. desin andconenience to the c#ient. / Increased reach 2ith cost s3read andra3id / "onnectiity at the i##ae #ee# enab#in ro2th A+Ms andother 3ayment deices. niue identifier "redit Bureau / Basis forinitiaties #ike credit history / "redit information trackin andsharin trackin and taretin for serices such as enab#es #endersto 3roide incenties to hea#th insurance those 2ith ood credithistory and / Best done by the Goernment or aencies 3roides astron deterrent to 2i##fu# such as 6IA. defau#t. InformationSharin +echno#oica# innoations / Inde3endent serice 3roider2i## take care / As smart cards, biometric I's, and rura# of M&Ia33rehensions on borro2er info$ kiosks sharin / 7e#3 in reducinthe transaction costs and / It reuires ski##ed 3ersonne#techno#oica# ra3id ro2th. adancements. =1. &uture Gro2th 8ut#ook 5ntry of 6e2 P#ayers Sustainabi#ity ofMicrofinance %o#e of Priate Sector Inestment &+%5 8+88K =. &uture Gro2th 8ut#ook SiFe and Gro2th: / "urrent#y G#oba#microfinance sector has estimated #oan 3ortfo#io of S

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1 bi##ion micro borro2ers in ??. / 0ithin net J years oan siFein Indian market is e3ected to ro2 to a siFe of about %s9? bi##ionfrom the current market siFe of %s bi##ion at a com3ounded annua#ro2th rate of @ and to J??$mi##ion c#ient base as aainst current19 mi##ion. / Greater deree of ca3ita# market ino#ement /&aorab#e attitude from Goernment of India and %BI Sca#abi#ity of

Microfinance in &uture / Inf#eib#e #oan 3roducts and unaai#abi#ityof sains and insurance serices due to reu#atory barriers are bihindrance for ro2th. / Insufficient data eists on c#ient$#ee#im3act, thouh ne2 too#s such as the Poerty Proress Inde ofGrameen &oundation and the 2ork of Sa$'han (Indian M&Is Association)on measurin c#ient satisfaction are addressin this a3. / +hemarket, and not the state, shou#d decide interest rates. / 5nsuretrans3arency and fu## disc#osure of rates inc#udin fees / 6e2+echno#oies ==. 5ntry of 6e2 P#ayers 6e2 P#ayer / 6e2 3#ayers may o3t forrou3 or indiidua# #endin, i##ae bankin or any other form of#endin that they find suitab#e. / +heir 3artici3ation 2i## de3end

on their ca3acity and commitment, #eadershi3, enab#in enironment,and access to financia# ca3ita#. 6on$Goernmenta# 8raniFations /More 6G8s are e3ected to incor3orate microfinance as one of their3rorams. / Internationa# 6G8s and aencies 2i## dee#o3microfinance 3rorams in areas 2here microfinancin is not a fami#iarconce3t in reducin 3oerty. / "ommunity$based oraniFations may etino#ed in microfinance serices. Goernment "hanne#s / Goernmentchanne#s at the rassroots #ee# may be used to sere the 3oor 2ithmicrofinance 2here there are no microfinance institutions, the /Posta# sains banks may 3artici3ate more iorous#y not on#y inmobi#iFin de3osits but a#so in 3roidin #oans to the 3oor and on$#endin funds to the M&Is. &orma# &inance Sector /

"oo3eraties-"redit nions may be more actie in 3roidin financia#serices to the 3oor. / More commercia# banks may 3artici3ate bothin microfinance 2ho#esa#e and retai#in. +hey may hae se3arate staffand 2indo2s to sere the 3oor. =J. Sustainabi#ity of Microfinance "onducie Po#icy %eform5nironment / Interest rate reforms for microcredit and sains /eib#e 5nironment to accommodate a 2ide array of microfinanceserice 3roiders to meet dierse demand / %edefinin the ro#e ofthe state in microfinance dee#o3ment to faci#itate the 3artici3ationof 3riate sector / 6on$financia# 3o#icies #ike aricu#tura# 3ricinand taation of micro$enter3rises 'ee#o3in !iab#e MicrofinanceInstitutions / 82nershi3 and oernance, Manaement information

systems and accountin 3o#icies and 3ractices / 'iersified 3roductsand serices / Manaement of 3ortfo#io ua#ity and ro2th /Systems, 3rocedures and financia# techno#oy for reducin transactioncosts and +rainin faci#ities Socia# Intermediation / A2areness$bui#din 3rorams on a broad rane of microfinance serices /Information dissemination amon serice 3roiders / Basic #iteracy,numeracy and ski##s trainin for 2omen, ethnic minorities and otherdisadantaed rou3s / Socia# mobi#iFation for the formation of

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community$based oraniFations and so#idarity rou3s =9. %o#e of Priate Sector Inestment M&I fundin a3 in India /&undin a3 for microfinance in India is hue. It simi#ar to #oba##ee#s. / An increasin ino#ement of 3riate sector inestors istherefore a key medium$ term 3riority to sca#e u3 microfinance. /+ota# forein M&I fundin of both I&Is and 3riate sector inestorsis e3ected to increase to S in

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the house they rent. "#ients / =1 of the househo#d run at #east onebusiness. / @> of the househo#ds hae at #east one outstandin#oan. / oans are taken from money#enders (J>), fami#y members(1=), and friends or neihbors (E). %are#y commercia# source /Tuicker sca#e u3 and Tuicker breakeen / 7iher #oan siFes -enter3rise #oans / Indiidua# #endin 3ossib#e in urban areas

833ortunities / +echno#oy can be better harnessed to 3roidefinancia# serices / Greater economic o33ortunities - markets /Microfinance has a ro#e to 3#ay in a##eiatin the housin shortaesthat create s#ums in the first 3#ace. / 6o dedicated fund forca3acity bui#din, technica# assistance to su33ort ro2th of urbanmicrofinance / 'oes not hae 6ABA%', as it is readi#y aai#ab#e forrura# microfinance. "ha##enes / Poor in the urban hae access tosains but they do not hae access to #oans. / 8n#y bi M&Is canbein o3eration as #oan siFe * start u3 cost 2i## be hiher in cities/ 7ih#y com3etitie because of the 3resence of the financia# ma4or3#ayers =>. %atin of Microfinance Institutions 6eed for %atin / 5nab#e

its c#ients to set 3rofessiona# benchmarks and standards / 5terna#commercia# fundin #ike P5, !", securitiFation and IP8 / 'esin3rorams that he#3s dee3en the rura# financia# markets Micro$"redit%atins Internationa# td. (M$"%I) / S3ecia#iFed ratin andmicrofinance research aency that has 3ioneered and successfu##yintroduced the ratin of Microfinance Institutions (M&Is) in Asia. /M$"%I undertakes ratins on credit2orthiness and oraniFationa#assessments)and a#so 3ro3rietary sectora# research Indicators forratin / Goernance and stratey: +he assessment de3ends on theua#ity and a33ro3riateness of the board com3osition, its ro#e andoera## oraniFationa# stratey. / Manaement systems: are rated onthe ua#ity of human resources, the strenth of critica# systems #ike

accountin and manaement information, staff 3roductiity andensurin com3#iance / &inancia# 3erformance: ea#uation reuires theratin team to construct financia# statements, based oninternationa##y acce3ted 3rudentia# norms, to 3resent a fair 3ictureof the o3erations. / M&Is financia# strenth based on as3ects #ikere3ayment 3erformance, asset ua#ity, #iuidity, Asset iabi#ityManaement (AM) and 3rofitabi#ity. J?. Abbreiations %eferences A665U%5

J1. Abbreiations Abbreiation Meanin M&I MicrofinanceInstitutions 6G8 6on$Goernmenta# 8ranisation S7G Sma## 7e#3 Grou36ABA%' 6ationa# Bank for Aricu#ture and %ura# 'ee#o3ment SI'BISma## Industria# 'ee#o3ment Bank of India A'B Asian 'ee#o3ment Bank%BI %esere Bank of India PS Pub#ic Sector nit 6B&" 6on$Bankin&inancia# "om3any HG Hoint iabi#ity Grou3 P5 Priate 5uity !"!enture "a3ita# I+ Income +a J. %eferences (1-9) / AB6 AM%8 (??). Presentation reardin"ommunity 5naement and Microfinance Initiaties in India, he#d on@th of Hu#y, ??, Amsterdam. / A##ianF AG. (Auust ??@).Microinsurance: 'emand and Market Pros3ects C India. Ber#in: A##ianFAG, G+V and 6'P. / Ananth, B. (??9). &inancin Microfinance C the

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I"I"I Bank 3artnershi3 mode#. Sma## 5nter3rise 'ee#o3ment. !o#. 1@,33. 9$@9. 0ar2ickshire: Practica# Action Pub#ishin. / B %Bhattachar4ee, S. S. (??J). 5merin Scenarios for Microfinance%eu#ation in India. Postfach 91E?, @9@ 5schborn: 'eutscheGese##schaft fWr+echnische Vusammenarbeit (G+V) Gmb7. / Basu, P. andP. Sriastaa (??9). Sca#in$u3 Microfinance for Indias %ura#

Poor. 0or#d Bank Po#icy %esearch 0orkin Pa3er =@J@. Non#ineO. N"itedat 1th of Auust, ??O. Aai#ab#e at the 0or#d 0ide 0eb:htt3:--un3an1.un.or-intradoc-rou3s-3ub#ic-documents-AP"I+D-6PA6?J=1.3df / Bindu Ananth, B. B. ('ecember ??J). A B#ue3rintfor the 'e#iery of "om3rehensie &inancia# Serices to the Poor inIndia. Mumbai, India: Institute for &inancia# Manaement and%esearch. / Business ine. (??=, Auust ). 6o ne2 #icences for#oca# area banks, +he 7indu Business ine. / "ho2dri, S.7. (??J).'o2nsca#in Institutions and "om3etitie Microfinance Markets:%ef#ections and "ase$Studies from atin America. Non#ineO. N"ited at=rd of Auust, ??O. Aai#ab#e at the 0or#d 0ide 0eb:Xhtt3:--222.microfinance

ate2ay.or-fi#es-111EY"a#meado2Y'o2nsca#inY&ina#YAdobe.3dfZ J=. %eferences (-9) / "#aire "ain Mi##er, &. (??@, 6oember1?). Microcredit: 0hy India is fai#in. %etrieed Hune ??>, =, fromhtt3:--222.rediff.com-: htt3:--222.rediff.com-Microcredit 0hy Indiais fai#in.htm / "o33oo#se, M. (??). Microfinance: An 5merinAsset "#ass &or 5uity and 'ebt Inestors. Non#ineO. N"ited at 9th ofSe3tember, ??O. Aai#ab#e at the 0or#d 0ide 0eb:Xhtt3:--222.microca3ita#.or-do2n#oads-2hite3a3ers-5merin.3dfZ /"ynus Business "onsu#tin * %esearch Pt. td. (Se3tember ??E).Industry %e3ort: Microfinance. Jth * 9th oors, Astra# 7eihts, %oad6o. 1, Ban4ara 7i##s, 7yderabad$9???=J, India: "ynus Business"onsu#tin * %esearch Pt. td. / 'uf#o, A. (??9). I"I"I Banks the

Poor in India: 'emonstrates +hat Serin o2$Income Sements IsProfitab#e. Microfinance Matters Bui#din Inc#usie &inancia#Sectors. Issue 1, 33. 1=$1@. Non#ineO. N"ited at 1=th of Auust,??O. Aai#ab#e at the 0or#d 0ide 0eb:Xhtt3:--222.uncdf.or-en#ish-microfinance-3ubs-ne2s#etter-3aes-??9Y1?-Microfinance YMattersYIssueY1.3dfZ / Ghate, P. (??@).Microfinance in India: A State of the Sector %e3ort, ??@. Non#ineO.N"ited at 1=th of Auust, ??O. Aai#ab#e at the 0or#d 0ide 0eb:Xhtt3:--222.microfinanceate2ay.or-content-artic#e-detai#-=@=JZ /7ar3er, M. (??). Se#f$he#3 rou3s and Grameen Bank rou3s: 0hat arethe differences; In +. &isher * M.S. Sriram (5ds.), Beyond micro$credit: Puttin dee#o3ment back into micro$ finance. 6e2 'e#hi:

!istaar. / 7art, ". P. (???). +he &ortune at the Bottom of thePyramid. Stratey and Business Issue , 33. 1$1J. JJ. %eferences (=-9) / 7ih Po2er "ommittee. (??). %e3ort ofthe 7ih Po2er "ommittee on rban "oo3eratie Banks. %BI Bu##etin.Mumbai: %esere Bank of India. / Hames %oth, ". ". (Se3tember ??9).Good and Bad Practices in Microinsurance: Microinsurance andMicrofinance Institutions 5idence from India. 6e2 Dork: "GAP 0orkinGrou3 on Microinsurance. / Hones, 7., M. 0i##iams, and D. +horat

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(??). %ura# &inancia# Institutions and Aents in India: A7istorica# and "ontem3orary "om3aratie Ana#ysis. Pa3er 3resented atthe Internationa# "onference on %ura# &inance %esearch: Moin%esu#ts into Po#icies and Practice. 7e#d at 1>$ ? March, ??. %ome./ K#aus, M. 5. (1>>>). %e3ort of 2orkin rou3 on sainsmobi#iFation, Bank %akyat Indonesia (B%I). 0ashinton '":

"onsu#tatie Grou3 to Assist the Poorest ("GAP), 0or#d Bank. /iesbeth Si4tsma, M. (Se3tember ??). Status %e3ort Microfinance inIndia. Mumbai: 6ether#ands P#atform for Microfinance. / M$"ri#.(??). Microfinance ratin: %isk assessment of Bank 'aan Ba#i.0ashinton '": "onsu#tatie Grou3 to Assist the Poorest. Aai#ab#e at222.ca3.or / Montomery, %., Bhattacharya, '., * 7u#me, '. (1>>@)."redit for the 3oor in Ban#adesh. In '. 7u#me * P. Mose#y, &inanceaainst 3oerty. ondon: %out#ede. / Mor, 6. (March ??9).53andin Access to &inancia# Serices $ 0here do 2e o from here;Mumbai, India: Institute for &inancia# Manaement and %esearch. /6ationa# Bank for Aricu#ture * %ura# 'ee#o3ment. (??@). Status ofMicro &inance in India. Meha#aya %eiona# 8ffice: 6ationa# Bank for

Aricu#ture * %ura# 'ee#o3ment. / %hyne, 5. (??1). Mainstreaminmicrofinance. "onnecticut: Kumarian Press. J9. %eferences (J-9) / %obinson, M. (??1). +he microfinancereo#ution: Sustainab#e finance for the 3oor. 0ashinton '": 0or#dBank. / %utherford, S. (???). +he 3oor and their money. 6e2 'e#hi:8ford niersity Press. / Sa$'han. (??). 5nhancin &inancia#o2s to the Poor: +he 0ay &or2ard. Summary of the sub$rou3 re3orts3resented to the em3o2ered committee on financia# f#o2s to theunoranised sector. 6e2 'e#hi: Sa$'han. / Shriram, M. S. (May ??).Presentation in 6A" on Microfinance in India. Ahmedabad: IIMAhmedabad. / Sinha, S. (??1). +he ro#e of centra# banks inmicrofinance in Asia and the Pacific. Mani#a: Asian 'ee#o3ment Bank.

/ SKS Microfinance. (March ??E). +he SKS Acce#eration Mode#:5m3o2erin the 3oor to become economica##y se#f $re#iant. 7yderabad:SKS Microfinance. / Smith, %. (??@). +he "hanin &ace ofMicrofinance in India: +he cost and Benefits of +ransformin from 6G8to 6B&". +ufts niersity: +he etcher Schoo#+ufts niersity. /Sriram, %. S. (Hune ??=). Microfinance: An Introduction. IIMBManaement %eie2, , 9$9=. / Sriram, M. S. (??1). "ase study ofS7A%5 rou3. In S 'atta * M. S. Sriram, o2 of "redit to Sma## andMarina# &armers in India (re3ort submitted to the Ministry ofAricu#ture, Goernment of India). Ahmedabad: Indian Institute ofManaement. / 3adhyayu#a, M. S. (??@). +he +ransformation of theMicrofinance Sector in India 53eriences, 83tions, and &uture.

Ahmedabad: IIM Ahmedabad. / LLL. (??). Information asymmetryand trust: A frame2ork for studyin microfinance in India (0P 6o.??$?>$?). Ahmedabad: Indian Institute of Manaement. J@. %eferences (9-9) / 0ardhana, A. (??1). Introduction. In M.%obinson (5d.) +he microfinance reo#ution: Sustainab#e finance forthe 3oor. 0ashinton '": 0or#d Bank. / Dunus, M. (??=). Somesuestions on #ea# frame2ork for creatin microcredit banks. 'haka:Grameen Bank.

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J. +hank Dou

1. Microfinance An Introduction Kabare Piyush Madhukar M.B.B.S(Mumbai), PGPM (Indian Institute of Manaement, Indore) Assistant

Manaer, !idarbha "#uster In$"hare Microfinance, %&'$%& *+ &inanceimited 2. Inde (1-) Introduction / 0hat is Microfinance / 'efinitionIndustry Preie2 / G#oba# 'ee#o3ments in Microfinance / Ma4or"hanes in Microfinance Scenario in South 5ast Asia / 'ee#o3mentsin Microfinance in India / Pi##ars of Microfinance in IndiaMicrofinance Industry Structure / %o#e of %BI ("entra# Bank) and6ABA%' (%eu#ator) / Ma4or P#ayers in the Industry / &inancinMode# ada3ted by Banks in Microfinance Industry / Microfinance'e#iery Mode# Microfinance endin Process / "#ient "haracteristicMicrofinance Serices / endin Process in Microfinance BusinessStratey / Business Strateies of Microfinance Institutions /

Business Strateies of Priate Banks-"ommercia# Banks / Gro2th'riers for Sector 3. Inde (-) Key "ha##enes / 7ih +ransaction and Serice "ost/ "redit %isk / 8ther %isks %ecommendations / %eu#ations andPo#icies / 83erationa# Im3roement &uture 8ut#ook / &uture Gro2th8ut#ook / 5ntry of 6e2 P#ayers / Sustainabi#ity of Microfinance /%o#e of Priate Sector Inestment S3ecia# Issues / %easons for&ai#ure to fu#fi## the desired ob4ectie / rban Microfinance /%atin of Microfinance Institutions Anneure / Abbreiations /%eferences 4. 0hat is Microfinance 'efinition I6+%8'"+I86

9. Introduction: 0hat is Microfinance; +he scenario of su33#y of

forma# financia# Access to financia# serices are serices 2ithinIndia constraint for the 3oor and not interest rates. +he 3oor cansae and can indeed use a An estimated demand for credit ranin from2ide rane of financia# serices.

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for 2aes or commissions ain income from rentin out sma## amountsof #and, ehic#es, draft anima#s, or machinery and too#s in bothrura# and urban areas. Key &eatures of Microfinance "ost Grou3 Prefer'o not Prefer Sma## end to the coerin a33raisa# 2omen take sainoer short$term 3oor interest and customers Security borro2in #oansrates uarantee oer men Microfinance means the 3roision of bankin

serices to #o2er$income 3eo3#e, es3ecia##y the 3oor and the ery3oor. . 'ee#o3ments in Microfinance C G#oba# 'ee#o3ments inMicrofinance C South 5ast Asia 'ee#o3ments in Microfinance C IndiaPi##ars of Microfinance in India I6'S+%D P%5!I50 E. 'ee#o3ments in Microfinance C G#oba# +he Grameen Bank hasSince 1>@, the Grameen been du3#icated in Bo#iia, Bank has ro2n toinc#ude "hi#e, "hina, 5thio3ia, Microfinance has s3read more than 9.9mi##ion 7onduras, India, Ma#aysia, to coer fie continents members2ith more than Ma#i, Phi#i33ines, Sri and numerous countries. S

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has started to eo#e in ear#y 1>E?s 2ith an effort of formininforma# Sma## 7e#3 Grou3 (S7G) to 3roide access of financia#serices to needy. India is nd most 3o3u#ous country behind "hina2ith a #are number of un$financed 3oor 3eo3#e $ Main c#ients forM&Is M&Is are estimated to hae .>J mi##ion borro2ers as of March??E 2ith "AG% of EE.J oer the #ast fie years and cumu#atie

outstandin #oan 3ortfo#io of S

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Microfinance 6ABA%' SI'BI 8ersees the #inkin 3roramme of banks toends to M&Is throuh SI'BI &oundation for S7Gs and offers refinancefor it micro$credit. 1J. Ma4or P#ayers in the %ura# &inance Market Pub#ic Sector Banks%eiona# Priate Banks %ura# Banks Priate &undin %ura# Schedu#e"ommercia# Institution Banks Market P#ayers "oo3eratie 6G8 BanksM&Is S7G 19. Microfinance 'e#iery Mode# Se#f 7e#3 Grou3s M&I-Grameen ea#&orms of M&Is / 7ome ro2n, co$ %e3#ica / 6G8 M&Is (Societieso3eratie / Grou3 endin and %eistration Act, 1E@? or / Sainsbased - #ed %eimented Proincia# Acts and-or / Meetin dierseneeds / &ocused on se#f$ Indian +rust Act, 1EE) / Promoted by6ABA%', sufficiency / 6on$3rofit "om3anies PS Banks, 6G8s / 6G8$M&I and 6B&"$ (Section 9 of the / Performance Cmied M&I "om3aniesAct, 1>9@) / Pace of ro2th $ cause / &inancia# "or3orations $ forconcern S3ecia#iFed entities focusin on s3ecific sements #ikeS"-S+, Minorities Grameen II 0ho#esome / Mutua##y Aided "reditSociety (MA"S) $ / Indiidua# #endin Microfinance community o2ned *$ / 6B&"$M&I Serices 3o3u#ar in Andhra Pradesh / "oo3eratie M&Is/ Proressie oan / %eu#ation ("oo3eratie Societies Acts focusedon / S3ecia#iFed actiities of the State * "entra# enter3rise /"ost is ma4or factor Goernments) / &uture of / 'istant dream /6on$Bankin &inancia# Microfinance "om3anies (6B&"s) (Indian"om3anies Act, 1>9@, %BI Act, 1>=J) 1@. &inancin Mode# ada3ted by Banks in Microfinance Industry Bank"#ient "redit 6G8 (&aci#itator) Promotion * +rainin S7G "#ientMember 'irect &inancin Mode# S7G$Bank inkae Mode# / Most M&Is userou3s as intermediaries / 6G8 to act as faci#itator-financia# forfinancia# transactions, but there are intermediaries bet2een bank and

S7G to different 2ays of 2orkin 2ith rou3s. initiate micro sainsthrouh an account / +he 6G8 3romotes, im3arts trainin, / +heintermediation cost cou#d be around forms rou3s and a#so iescredit to @ of the #oan amount. them. / %isk #ies 2ith the banks asadances to / nder this mode# either S7Gs are formed the S7Gs areref#ected in bank 3ortfo#ios. by banks or by 6G8s and forma# aencies/ Banks bear risk as it ino#e a #ot of but are financed by banks.transaction costs. 1. "#ient "haracteristic Microfinance Serices endin Process inMicro$&inance MI"%8&I6A6"5 56'I6G P%8"5SS 1E. "#ient "haracteristic Microfinance Serices Actiity %o5 %oI"6et Annua# "#assification of Actiities $ %eturn in S< Micro$credit

oan +rade !eetab#e !endin 9? 9 1J= +rade Production ie StockGenera# Store 1J > 1JJ Serice Aricu#ture 8ther S2eet Makin Sho31J9 1J 1?1? Ice "ream Makin 1= > =?9 = @ Aricu#ture easinmano trees 1EJ 1E9 911 == easin irriated farm #and 1@? 1@1 @@9 Serices 83eratin a our Mi## 9 9> J?> +ai#orin 11 1= =?1? = %oadside Micro$diner J9 J@ 19E iestock Goat rearin 9E@9 J? Buffa#o rearin @> J J@ Production Pottery =9 =@ 9?Microfinance c#ients are 3oor 2ith Actiities in rura# areas arefarmin, food 3rocessin, 3etty trade, re#atie#y stab#e source of

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income. #iestock, endin, and 3roduction #ike basket 2eain."#ients of microfinance are ec#uded by Actiities in urban areas aresho3s, serices, artisans, street forma# financia# institutions.endors * ne2 ae businesses (beauty 3ar#or to 3hotora3hy). 0omenmake u3 the ast ma4ority of Ma4ority of the 3o3u#ation borro2 fortradin, 2orkin ca3ita# borro2ers, es3ecia##y in Asia (>>).

reuirements for eistin business or for settin u3 ne2 one. 1>. endin Process in Micro$&inance Geo$5conomic / Based on theeo$economic information about his reion (ty3ica##y a district orSurey of %eion manda#) and arious to2ns and i##aes, M&I a33roachfaorab#e i##aes. / +hen M&I isits the i##ae *tries to atherfirst hand information about the 3o3u#ation !i##ae A33raisa# of thati##ae, their re#iion, cast, ty3e of trades, ski##s, financia#states, their needs. / "onducts a surey to ea#uate 3otentia#ityfor the o3erations in the i##ae, some key Se#ection of !i##ae3arameters are tota# 3o3u#ation, 3oerty #ee#, accessibi#ity,3o#itica# stabi#ity * safety. / After se#ection of i##ae,interested 2omen form se#f se#ected four to si member Grou3

&ormation rou3s to sere as uarantors for each other. +his 3rocessis ca##ed Grou3 &ormation. / 0hen formed rou3 meets the minimumreuirements, it beins "om3u#sory Grou3 +rainin of +rainin 3roramdesined to educate c#ients on the 3rocesses and 3rocedures ofBorro2ers microfinance #oans and bui#d a cu#ture of creditdisci3#ine. Scrutiny and / "ustomer detai#s, their business andtheir earnin ca3acity are scrutiniFed and 4uded nder2ritin toaccess re3ayin ca3acity. &inancia# / "o##ection meetins are he#don a 2eek#y-month#y basis by &ie#d Assistants to conduct +ransactionsa## financia# transactions. In addition, c#ients use the 2eek#ymeetins to discuss ne2 #oan a33#ications, #oan uti#iFation andcommunity issues. 6ear Mandatory / Insurance 3roducts are so#d to

coer death, accident or hea#th of rou3 member, Insurance memberss3ouse and-or chi#dren. ?. Business Strateies of Microfinance Institutions BusinessStrateies of Priate Banks-"ommercia# Banks Gro2th 'riers forSector BSI65SS S+%A+5GD 1. Business Stratey of Microfinance Institutions Socia# Sericesand Initiaties: Inc#ude +echno#oy: +o Inestment in nutrition,eerain &inance: +he oercome its transaction hea#th, education,and 6G8 #eeraes #ie#ihood costs, increase the s3eed ocationa#trainin, inestments by #inkin of transaction, reduce Aricu#tura#and Business the rura# 3oor to redundancies and dee#o3ment serices.oernment 3rorams better contro# and banks. mechanism. 7uman%esource earnin Best Practices "a3acity Bui#din: from the Business2orksho3s, s3ecia# 0or#d: ike standardiFed 3rorams, trainins anddistribution 3rocess e3osure isits of the used by Mc'ona#d staffand c#ients. Geora3hica# 53ansion Business "om3#ete Bouuet of and!ertica# 53ansion: Increasin the indiidua# Stratey &inancia#Serices: #ike Sains, "redit , #oan 3ortfo#io by of M&Is Insurancefor the #ies 3roidin Micro and #ie#ihoods of the 5nter3rise oan,bier 3oor, Infrastructure than HG #oans. finance

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. Business Strateies of Priate Banks-"ommercia# Banks / M&Isidentify, train * 3romote microfinance c#ients. Bank financesPartnershi3 Mode# c#ients direct#y on the recommendation of the M&I."ustomer and 3ortfo#io resides in the banks book. / Bank buys out3ortfo#ios from M&Is. M&I continues to serice the Securitisation ofc#ients and acts as the co##ection aent. M&I shares the credit riskPortfo#ios of M&Is 2ith the bank. / Ado3tin a "ore Bankin Systemfor manain the #oan 3ortfo#io +echno#oy enerated under the3artnershi3 mode#. "redit to / A 2ho#esa#e #inkae mode# 2hichim3#ies etendin a bu#k #oan to M&Is-6G8s the M&Is for #endin to3oor 2omen Systems and oan / Actie ino#ement in 3roidinmentorin serices to c#ients, Portfo#io 5a#uation inc#udin in theareas of oernance and credit disci3#ine. iaisons 2ith the /83eratin diisions at reiona# and branch #ee# are in c#ose 6G8sconnection 2ith 6G8s in #oca# area to take the moement ahead. 7ihtransaction cost, 3oor reach and unaai#abi#ity ua#ity man3o2er, hasob#ied Banks to ada3t arious a33roaches throuh Microfinance tofu#fi## 3riority sector #endin norms =. Gro2th 'riers for Sector / ack of #endin from Banks due to#ack of co##atera# and e3#oitation from 6eed for "redit by money#enders has eem3#ified the 3otentia# demand for microfinancen3rii#eed "#ass serices and the ro2th 3ros3ects of the industry./ +hese inc#ude commercia# debt and euity, form of rants anddonations Increase in the and P5 inc#udin !" fundin. +his haschaned ca3ita# structure of this sources of finance industry forbetter / Innoation in diersifyin #ender base, conso#idatininterna# contro# systems Innoation and strenthen 3o#icies on humanresources, disc#osure, and oranisationa# 3rocesses. GoernmentPo#icy / Microfinance Bi## * 3ro3osed reu#ator 6ABA%' 2i## reu#ate* 3romote and Su33ort ro2th of this sector in #ine 2ith im3ortanceattached by oernment to this sector. "onso#idation in the /Increase in the number of 3artners in the commercia# s3ace 2i##enab#e Industry them to introduce ne2 3roducts in insurance,remittance etc. Gro2in Miration / 7iher aerae #oan siFe andreater use of techno#oy such as smart cards and rbaniFation and3oint$of$sa#e deices 2ith 2ire#ess connectiity. in the urban areas2i## increase urban micro$financin. 7uman %esource / Microfinanceis attractin hih ua#ity, ta#ented manaers. Peo3#e 2ith ski##s"a3acities in s3ecia#iFed 7% needs such as #oca# recruitments andcu#tura# and #inuistic interation StandardiFin the o3eratin3rocess and systems J. 7ih +ransaction and Serice "ost "redit %isk 8ther %isks K5D"7A56G5S 9. 7ih +ransaction and Serice "ost %easons / Aeraemicrofinance #oan siFe is sma##, hence the transaction cost on a3ercentae basis for a microfinance #oan is hiher. / endin #aresiFe #oan may reuire ea#uatin the c#ient, aain increasin cost+he most 3o3u#ar form of #endin in / !ery hih o3erationa# costs,es3ecia##y at India is HG mode# 2hich incurs #oan oriination *durin monitorin is 3ecu#iar costs such as rou3 formation because

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of doorste3 serice and #itt#e or no costs, cost of trainin theborro2ers de3#oyment of techno#oy so#utions. 2ith res3ect to the3rocedures to be / Intense monitorin and re3eated fo##o2ed, hiherderee of interaction. su3erision, as 2e## as hiher / Increasedcom3etition 2i## #ead to better freuency of insta##ment 3ayments.ua#ity in serices, #o2er #oan siFes, #o2er M&Is face the cha##ene

of findin rate of interests, diersification of 3roducts and use oftechno#oy as 2e## to reduce the 2ays to reduce #endin costs.transaction cost and cost of #endin. +echno#oy innoation, im3roedrura# infrastructure, borro2er education and urban microfinance arefe2 2ays to mitiate hih transaction cost @. "redit %isk Irreu#ar o2 of / Seasona#ity of aricu#tura#actiities * uniue reuirements of Income due to financin suchactiities (3ayback of #oans can on#y take 3#ace Seasona#ity after3roduction) / +raditiona# farmin 3ractices, heay de3endence onmonsoon, 7ih 'e3endence on heay de3endence on the seasona# income,makin it difficu#t to Monsoon assess borro2ers re3ayment ca3acity.ncertainty of / %isk arises because of the nature of uncertainty

ino#ed 2ith Market "onditions aricu#tura# out3ut L in terms ofyie#d and 3rice. ack of Ski##s #eadin / 'ue to #ack of 3ro3ereducation and ocationa# ski##s, their to n$em3#oyabi#ityem3#oyabi#ity in non$farmin 4obs is ery #o2. ack of +anib#e /Absence of #and deed, no records #ike I+ returns irreu#ar f#o2 ofProof for Assessment income due to seasona#ity constitutes #ack oftanib#e income of Income 3roof. 6eed for Information / Adersese#ection, oer$indebtedness of c#ients and mora# haFard Sharin *Better due to ack of information about credit$2orthiness of3otentia# +echno#oy c#ients. . 8ther %isks 83erationa# %isk / Inadeuate or fai#ed interna#3rocess due to 3eo3#e, system or eterna# eents. / %ura# 3eo3#e donot hae credit history backround. Business Promotion / M&Is needski##s in business manaement, such as marketin , finance and 7%. /'e#iery of these ski##s is 3endin issue for most of them iteracy *Ski## ee#s of "#iente#e / o2 #ee#s of #iteracy, re#atie#yundiersified economies, hih de3endence on aricu#ture / %ura#economic actiities hae #o2 3rofitabi#ity and 3rone to hih risk'iersion of &unds to n3roductie Actiities / se of #oans forun3roductie actiities instead of 3ur3ose stated to the #ender / Itis ery difficu#t to assess 2here he-she is oin to uti#iFe themoney. %eu#atory Issues / Sti## unreu#ated and not su3erised byany dedicated body. / M&Is are ro2in fast * they reuirereu#atory authority to faci#itate the ro2th. E. %eu#ations and Po#icies 83erationa# Im3roement%5"8MM56'A+I86S >. %eu#ations and Po#icies / 'efinition of M&I: 5ncom3ass anda##o2 M&Is to sere 3oor not on#y as #ender but as fu## financia#serice 3roider 2ithout increasin risk for 3oor customer and M&Iitse#f. / %econition of M&I as s3ecia#iFed actiity on 3ar 2ith#easin or housin finance and creation of a s3ecia#iFed cateory of6B&" NAmendment to the %BI ActO / 5asin of entry norms for #oans

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on#y com3aniesQ. As these com3anies 2i## not acce3t sains or offerfinancia# serices, they carry #ess risk of defau#t (6eed a %BInotification) / Mechanism to raduate to Microcredit R Serice bya##o2 for #imited and #addered 3roisions for stron com3anies tomor3h into bank. (Ma4or 3o#icy * #ea# chane) / 5nsure thatcommercia# actiities #ike microfinance are carried out in commercia#

forms of oraniFations 2hen they reach sca#e. +rusts-Societies arenot desined to do so. / M&I can be best reu#ated on suriousQinterest and ethica# 3ractices by un#eashin co$ o3eratie and thebankin sector to 3roide effectie com3etition. / State shou#d notinterfere in the commerce of the sector by offerin oan 2aiers orbad 3o#icy interentions #ike Interest rate ca3s (een informa#ca3s). =?. 83erationa# Im3roement &ocus on rban Microfinance %ura#Infrastructure / 7ih customer density #eads to decrease / 8fferfinancia# serices 2ith a su3erior transaction cost. desin andconenience to the c#ient. / Increased reach 2ith cost s3read andra3id / "onnectiity at the i##ae #ee# enab#in ro2th A+Ms and

other 3ayment deices. niue identifier "redit Bureau / Basis forinitiaties #ike credit history / "redit information trackin andsharin trackin and taretin for serices such as enab#es #endersto 3roide incenties to hea#th insurance those 2ith ood credithistory and / Best done by the Goernment or aencies 3roides astron deterrent to 2i##fu# such as 6IA. defau#t. InformationSharin +echno#oica# innoations / Inde3endent serice 3roider2i## take care / As smart cards, biometric I's, and rura# of M&Ia33rehensions on borro2er info$ kiosks sharin / 7e#3 in reducinthe transaction costs and / It reuires ski##ed 3ersonne#techno#oica# ra3id ro2th. adancements. =1. &uture Gro2th 8ut#ook 5ntry of 6e2 P#ayers Sustainabi#ity of

Microfinance %o#e of Priate Sector Inestment &+%5 8+88K =. &uture Gro2th 8ut#ook SiFe and Gro2th: / "urrent#y G#oba#microfinance sector has estimated #oan 3ortfo#io of S

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rou3 or indiidua# #endin, i##ae bankin or any other form of#endin that they find suitab#e. / +heir 3artici3ation 2i## de3endon their ca3acity and commitment, #eadershi3, enab#in enironment,and access to financia# ca3ita#. 6on$Goernmenta# 8raniFations /More 6G8s are e3ected to incor3orate microfinance as one of their3rorams. / Internationa# 6G8s and aencies 2i## dee#o3

microfinance 3rorams in areas 2here microfinancin is not a fami#iarconce3t in reducin 3oerty. / "ommunity$based oraniFations may etino#ed in microfinance serices. Goernment "hanne#s / Goernmentchanne#s at the rassroots #ee# may be used to sere the 3oor 2ithmicrofinance 2here there are no microfinance institutions, the /Posta# sains banks may 3artici3ate more iorous#y not on#y inmobi#iFin de3osits but a#so in 3roidin #oans to the 3oor and on$#endin funds to the M&Is. &orma# &inance Sector /"oo3eraties-"redit nions may be more actie in 3roidin financia#serices to the 3oor. / More commercia# banks may 3artici3ate bothin microfinance 2ho#esa#e and retai#in. +hey may hae se3arate staffand 2indo2s to sere the 3oor.

=J. Sustainabi#ity of Microfinance "onducie Po#icy %eform5nironment / Interest rate reforms for microcredit and sains /eib#e 5nironment to accommodate a 2ide array of microfinanceserice 3roiders to meet dierse demand / %edefinin the ro#e ofthe state in microfinance dee#o3ment to faci#itate the 3artici3ationof 3riate sector / 6on$financia# 3o#icies #ike aricu#tura# 3ricinand taation of micro$enter3rises 'ee#o3in !iab#e MicrofinanceInstitutions / 82nershi3 and oernance, Manaement informationsystems and accountin 3o#icies and 3ractices / 'iersified 3roductsand serices / Manaement of 3ortfo#io ua#ity and ro2th /Systems, 3rocedures and financia# techno#oy for reducin transactioncosts and +rainin faci#ities Socia# Intermediation / A2areness$

bui#din 3rorams on a broad rane of microfinance serices /Information dissemination amon serice 3roiders / Basic #iteracy,numeracy and ski##s trainin for 2omen, ethnic minorities and otherdisadantaed rou3s / Socia# mobi#iFation for the formation ofcommunity$based oraniFations and so#idarity rou3s =9. %o#e of Priate Sector Inestment M&I fundin a3 in India /&undin a3 for microfinance in India is hue. It simi#ar to #oba##ee#s. / An increasin ino#ement of 3riate sector inestors istherefore a key medium$ term 3riority to sca#e u3 microfinance. /+ota# forein M&I fundin of both I&Is and 3riate sector inestorsis e3ected to increase to S

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inestment actiities of 3ub#ic and 3riate inestors, 2ith 3ub#icinestments idea##y actin as mu#ti3#ier for 3riate sectorinestments / se of structured debt instruments 2i## a##o2ino#ement of risk$aerse commercia# inestors / Increasedattractieness to institutiona# inestors such as 3ension funds,insurance com3anies or trusts as su33#ement to their 3ortfo#ios =@. %easons for &ai#ure to fu#fi## the desired ob4ectie rbanMicrofinance %atin of Microfinance Institutions SP5"IA ISS5S =. %easons for &ai#ure to fu#fi## the desired ob4ectieAai#abi#ity of #ess risky and more re2ardin customers / M&Is arefundin ha2kers and traders branded as 3oor in urban and semi$urbanand een in i##aes as 3ayin ca3acity of these customer is ood /&armers are aoided due to seasona# and un3redictab#e income source.833ortunity to become intermediaries of commercia# banks / Banksaoid such #endin but are under com3u#sion of oernments andreu#ators to shore u3 mandatory reuirement 3ercentaes . / &oreinbanks 3roide faci#ities to securitiFe these #oans 2ith somediscounts to ease the burden of statutory as 2e## as cor3orate socia#res3onsibi#ity. Proidin short term #oans based on cash tradintransactions / +hese transactions enera##y et 3aid and hence nodefau#t or #east number of defau#t arises / Such short termtransactions he#3 creation of rou3 #endin and rou3 uarantee bothinforma##y and forma##y 2ithout much 3ersuasion. %esistant to #oan&armers / &armin is not yet become iab#e due to de3endence onmonsoon, inadeuate irriation faci#ities and #ack of moderniFinfarmin / ack of kno2#ede of shift in techno#oy in cro33in3attern and irriation as 2e## as soi# maintenance and dee#o3ment.0ron M&I assessment too#s / M&Is are sti## assessed on the basis oftheir coerae, 3rofitabi#ity and hih #ee# of re3ayment inde /+hey shou#d be assessed on success in achiein their 3rimary oa#s3oerty a##eiations and inc#usie ro2th. =E. rban Microfinance / 7ih 3ro3ortion of 2ae earner amonurban 3oor / Aerae fami#y siFe is 9 2ith a month#y e3enditure of%s9???. / @ of the househo#d #ie in their o2n house and > inthe house they rent. "#ients / =1 of the househo#d run at #east onebusiness. / @> of the househo#ds hae at #east one outstandin#oan. / oans are taken from money#enders (J>), fami#y members(1=), and friends or neihbors (E). %are#y commercia# source /Tuicker sca#e u3 and Tuicker breakeen / 7iher #oan siFes -enter3rise #oans / Indiidua# #endin 3ossib#e in urban areas833ortunities / +echno#oy can be better harnessed to 3roidefinancia# serices / Greater economic o33ortunities - markets /Microfinance has a ro#e to 3#ay in a##eiatin the housin shortaesthat create s#ums in the first 3#ace. / 6o dedicated fund forca3acity bui#din, technica# assistance to su33ort ro2th of urbanmicrofinance / 'oes not hae 6ABA%', as it is readi#y aai#ab#e forrura# microfinance. "ha##enes / Poor in the urban hae access tosains but they do not hae access to #oans. / 8n#y bi M&Is canbein o3eration as #oan siFe * start u3 cost 2i## be hiher in cities/ 7ih#y com3etitie because of the 3resence of the financia# ma4or

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3#ayers =>. %atin of Microfinance Institutions 6eed for %atin / 5nab#eits c#ients to set 3rofessiona# benchmarks and standards / 5terna#commercia# fundin #ike P5, !", securitiFation and IP8 / 'esin3rorams that he#3s dee3en the rura# financia# markets Micro$"redit%atins Internationa# td. (M$"%I) / S3ecia#iFed ratin andmicrofinance research aency that has 3ioneered and successfu##yintroduced the ratin of Microfinance Institutions (M&Is) in Asia. /M$"%I undertakes ratins on credit2orthiness and oraniFationa#assessments)and a#so 3ro3rietary sectora# research Indicators forratin / Goernance and stratey: +he assessment de3ends on theua#ity and a33ro3riateness of the board com3osition, its ro#e andoera## oraniFationa# stratey. / Manaement systems: are rated onthe ua#ity of human resources, the strenth of critica# systems #ikeaccountin and manaement information, staff 3roductiity andensurin com3#iance / &inancia# 3erformance: ea#uation reuires theratin team to construct financia# statements, based oninternationa##y acce3ted 3rudentia# norms, to 3resent a fair 3icture

of the o3erations. / M&Is financia# strenth based on as3ects #ikere3ayment 3erformance, asset ua#ity, #iuidity, Asset iabi#ityManaement (AM) and 3rofitabi#ity. J?. Abbreiations %eferences A665U%5

J1. Abbreiations Abbreiation Meanin M&I MicrofinanceInstitutions 6G8 6on$Goernmenta# 8ranisation S7G Sma## 7e#3 Grou36ABA%' 6ationa# Bank for Aricu#ture and %ura# 'ee#o3ment SI'BISma## Industria# 'ee#o3ment Bank of India A'B Asian 'ee#o3ment Bank%BI %esere Bank of India PS Pub#ic Sector nit 6B&" 6on$Bankin&inancia# "om3any HG Hoint iabi#ity Grou3 P5 Priate 5uity !"!enture "a3ita# I+ Income +a

J. %eferences (1-9) / AB6 AM%8 (??). Presentation reardin"ommunity 5naement and Microfinance Initiaties in India, he#d on@th of Hu#y, ??, Amsterdam. / A##ianF AG. (Auust ??@).Microinsurance: 'emand and Market Pros3ects C India. Ber#in: A##ianFAG, G+V and 6'P. / Ananth, B. (??9). &inancin Microfinance C theI"I"I Bank 3artnershi3 mode#. Sma## 5nter3rise 'ee#o3ment. !o#. 1@,33. 9$@9. 0ar2ickshire: Practica# Action Pub#ishin. / B %Bhattachar4ee, S. S. (??J). 5merin Scenarios for Microfinance%eu#ation in India. Postfach 91E?, @9@ 5schborn: 'eutscheGese##schaft fWr+echnische Vusammenarbeit (G+V) Gmb7. / Basu, P. andP. Sriastaa (??9). Sca#in$u3 Microfinance for Indias %ura#Poor. 0or#d Bank Po#icy %esearch 0orkin Pa3er =@J@. Non#ineO. N"ited

at 1th of Auust, ??O. Aai#ab#e at the 0or#d 0ide 0eb:htt3:--un3an1.un.or-intradoc-rou3s-3ub#ic-documents-AP"I+D-6PA6?J=1.3df / Bindu Ananth, B. B. ('ecember ??J). A B#ue3rintfor the 'e#iery of "om3rehensie &inancia# Serices to the Poor inIndia. Mumbai, India: Institute for &inancia# Manaement and%esearch. / Business ine. (??=, Auust ). 6o ne2 #icences for#oca# area banks, +he 7indu Business ine. / "ho2dri, S.7. (??J).'o2nsca#in Institutions and "om3etitie Microfinance Markets:%ef#ections and "ase$Studies from atin America. Non#ineO. N"ited at

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=rd of Auust, ??O. Aai#ab#e at the 0or#d 0ide 0eb:Xhtt3:--222.microfinanceate2ay.or-fi#es-111EY"a#meado2Y'o2nsca#inY&ina#YAdobe.3dfZ J=. %eferences (-9) / "#aire "ain Mi##er, &. (??@, 6oember1?). Microcredit: 0hy India is fai#in. %etrieed Hune ??>, =, fromhtt3:--222.rediff.com-: htt3:--222.rediff.com-Microcredit 0hy Indiais fai#in.htm / "o33oo#se, M. (??). Microfinance: An 5merinAsset "#ass &or 5uity and 'ebt Inestors. Non#ineO. N"ited at 9th ofSe3tember, ??O. Aai#ab#e at the 0or#d 0ide 0eb:Xhtt3:--222.microca3ita#.or-do2n#oads-2hite3a3ers-5merin.3dfZ /"ynus Business "onsu#tin * %esearch Pt. td. (Se3tember ??E).Industry %e3ort: Microfinance. Jth * 9th oors, Astra# 7eihts, %oad6o. 1, Ban4ara 7i##s, 7yderabad$9???=J, India: "ynus Business"onsu#tin * %esearch Pt. td. / 'uf#o, A. (??9). I"I"I Banks thePoor in India: 'emonstrates +hat Serin o2$Income Sements IsProfitab#e. Microfinance Matters Bui#din Inc#usie &inancia#Sectors. Issue 1, 33. 1=$1@. Non#ineO. N"ited at 1=th of Auust,??O. Aai#ab#e at the 0or#d 0ide 0eb:

Xhtt3:--222.uncdf.or-en#ish-microfinance-3ubs-ne2s#etter-3aes-??9Y1?-Microfinance YMattersYIssueY1.3dfZ / Ghate, P. (??@).Microfinance in India: A State of the Sector %e3ort, ??@. Non#ineO.N"ited at 1=th of Auust, ??O. Aai#ab#e at the 0or#d 0ide 0eb:Xhtt3:--222.microfinanceate2ay.or-content-artic#e-detai#-=@=JZ /7ar3er, M. (??). Se#f$he#3 rou3s and Grameen Bank rou3s: 0hat arethe differences; In +. &isher * M.S. Sriram (5ds.), Beyond micro$credit: Puttin dee#o3ment back into micro$ finance. 6e2 'e#hi:!istaar. / 7art, ". P. (???). +he &ortune at the Bottom of thePyramid. Stratey and Business Issue , 33. 1$1J. JJ. %eferences (=-9) / 7ih Po2er "ommittee. (??). %e3ort ofthe 7ih Po2er "ommittee on rban "oo3eratie Banks. %BI Bu##etin.Mumbai: %esere Bank of India. / Hames %oth, ". ". (Se3tember ??9).Good and Bad Practices in Microinsurance: Microinsurance andMicrofinance Institutions 5idence from India. 6e2 Dork: "GAP 0orkinGrou3 on Microinsurance. / Hones, 7., M. 0i##iams, and D. +horat(??). %ura# &inancia# Institutions and Aents in India: A7istorica# and "ontem3orary "om3aratie Ana#ysis. Pa3er 3resented atthe Internationa# "onference on %ura# &inance %esearch: Moin%esu#ts into Po#icies and Practice. 7e#d at 1>$ ? March, ??. %ome./ K#aus, M. 5. (1>>>). %e3ort of 2orkin rou3 on sainsmobi#iFation, Bank %akyat Indonesia (B%I). 0ashinton '":"onsu#tatie Grou3 to Assist the Poorest ("GAP), 0or#d Bank. /iesbeth Si4tsma, M. (Se3tember ??). Status %e3ort Microfinance in

India. Mumbai: 6ether#ands P#atform for Microfinance. / M$"ri#.(??). Microfinance ratin: %isk assessment of Bank 'aan Ba#i.0ashinton '": "onsu#tatie Grou3 to Assist the Poorest. Aai#ab#e at222.ca3.or / Montomery, %., Bhattacharya, '., * 7u#me, '. (1>>@)."redit for the 3oor in Ban#adesh. In '. 7u#me * P. Mose#y, &inanceaainst 3oerty. ondon: %out#ede. / Mor, 6. (March ??9).53andin Access to &inancia# Serices $ 0here do 2e o from here;Mumbai, India: Institute for &inancia# Manaement and %esearch. /

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6ationa# Bank for Aricu#ture * %ura# 'ee#o3ment. (??@). Status ofMicro &inance in India. Meha#aya %eiona# 8ffice: 6ationa# Bank forAricu#ture * %ura# 'ee#o3ment. / %hyne, 5. (??1). Mainstreaminmicrofinance. "onnecticut: Kumarian Press. J9. %eferences (J-9) / %obinson, M. (??1). +he microfinancereo#ution: Sustainab#e finance for the 3oor. 0ashinton '": 0or#dBank. / %utherford, S. (???). +he 3oor and their money. 6e2 'e#hi:8ford niersity Press. / Sa$'han. (??). 5nhancin &inancia#o2s to the Poor: +he 0ay &or2ard. Summary of the sub$rou3 re3orts3resented to the em3o2ered committee on financia# f#o2s to theunoranised sector. 6e2 'e#hi: Sa$'han. / Shriram, M. S. (May ??).Presentation in 6A" on Microfinance in India. Ahmedabad: IIMAhmedabad. / Sinha, S. (??1). +he ro#e of centra# banks inmicrofinance in Asia and the Pacific. Mani#a: Asian 'ee#o3ment Bank./ SKS Microfinance. (March ??E). +he SKS Acce#eration Mode#:5m3o2erin the 3oor to become economica##y se#f $re#iant. 7yderabad:SKS Microfinance. / Smith, %. (??@). +he "hanin &ace ofMicrofinance in India: +he cost and Benefits of +ransformin from 6G8

to 6B&". +ufts niersity: +he etcher Schoo#+ufts niersity. /Sriram, %. S. (Hune ??=). Microfinance: An Introduction. IIMBManaement %eie2, , 9$9=. / Sriram, M. S. (??1). "ase study ofS7A%5 rou3. In S 'atta * M. S. Sriram, o2 of "redit to Sma## andMarina# &armers in India (re3ort submitted to the Ministry ofAricu#ture, Goernment of India). Ahmedabad: Indian Institute ofManaement. / 3adhyayu#a, M. S. (??@). +he +ransformation of theMicrofinance Sector in India 53eriences, 83tions, and &uture.Ahmedabad: IIM Ahmedabad. / LLL. (??). Information asymmetryand trust: A frame2ork for studyin microfinance in India (0P 6o.??$?>$?). Ahmedabad: Indian Institute of Manaement. J@. %eferences (9-9) / 0ardhana, A. (??1). Introduction. In M.

%obinson (5d.) +he microfinance reo#ution: Sustainab#e finance forthe 3oor. 0ashinton '": 0or#d Bank. / Dunus, M. (??=). Somesuestions on #ea# frame2ork for creatin microcredit banks. 'haka:Grameen Bank. J. +hank Dou