“Issues and Concerns in Micro Financing

in India”
By Prof Chowdari Prasad, TAPMI, Manipal

Email: chowdarip@tapmi.edu.in

Presented at the

National Level Conference on

“Indian Banking System : Challenges

Ahead”
Held on 7th & 8th January 2011

Organizers: SDM College of Business Management,

Mangalore

In association with

Bankers’ Club, Mangalore

Sponsored by University Grants Commission, New Delhi

(South Western Regional Office, Bangalore)

Session No.2 on 7th January 2011

Micro Financing & Infrastructure Financing

Venue: Conference Room, SDM College of Business

Management,

Mangalore
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 “Issues and Concerns in Micro Financing in India”

By Prof Chowdari Prasad,

Professor & Dean (Planning & Development)

TAPMI, Manipal, Karnataka-576104

Email: chowdarip@tapmi.edu.in
Tel: 0820-2701045 and Mobile: 09482549472, 09242124642

A: Introduction

Rural Banking and poverty amelioration have been the conscious and concerted efforts by all the
agencies involved in the development and progress of the less fortunate sections of India since
independence. When co-operative banking system was unable to deliver the expected results,
commercial banks were asked to step in, the first one being conversion of Imperial Bank of India
to State Bank of India in 1955 with a mandate to go rural. In 1969, the first bunch of 14 banks
was nationalized simultaneously when Lead Bank Scheme was introduced asking the banking
system (public as well as private sector) to focus on Priority Sector Lending. Several programs
like Differential Interest Rate Scheme (DIR-1972), Integrated Rural Development Program
(IRDP) andTwenty Point Economic Program (TPEP) were introduced followed by formation of
Small & Marginal Farmers Development Agencies (SFDA) and District Rural Developmental
Agencies (DRDA) at district level, and Regional Rural Banks (RRBs) as low cost developmental
banks in 1975. The primary idea was to relieve the rural folk from the clutches of the village
money lenders.

Then there was a second round of nationalization of six more banks in 1980 with a direction to
take banking to grass roots level. Side by side, all these types banks were directed to lend to the
poorer sections as a target group at concessional terms of security, margin and rates of interest.
With the economy set to be undergoing the financial sector reforms in early nineties, the priority
sector lending was never given up. In late eighties, a modified concept called Service Area
Approach was also attempted to ensure banking services are extended throughout the country. To
a large extent, the entire banking system responded to achieve the goal of 40% lending to priority
sector with the sub-goals also achieved conscientiously. Even the Foreign Banks (with a target
of 32% lending to go to priority sector) and Local Area Banks (set up in mid-nineties) were also
not spared to comply with the requirements on par with the public and old/new private sector

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banks in India. Around the year 2005, the concept of Financial Inclusion caught up with all
agencies which is an ongoing exercise.

Amidst this background, a new set of outfits sprung up in India (also world over, of course)
during the middle of the first decade of the new millennium called Microfinance Institutions
(MFIs). While there have been certain MFIs like SEWA and BCT operating for nearly four
decades rendering yeoman service to the rural poor and women, the new bunch of organizations
have appeared on the scene and exploiting the beneficiaries with high rates of interest on the
loans. Like the menace experienced in India during the last decade of nineties due to the
presence of Non-Banking Finance Companies (NBFCs), these MFIs have suddenly become a
nuisance causing severe problems to the entire rural lending and developmental arena. While
these outfits are normally expected to be non-governmental or not-for-profit organizations
purveying cheaper credit on liberal terms with service as a motto, filling the gap created by the
formal banking system for obvious reasons, an entirely new environment has set in the entire
country. Poor farmers were resorting to committing suicides when either their crops failed or
were unable to honour their repayment obligations to the formal system. With the recent
developments in MFI sector, a new question has arisen that whether these institutions are
conducting themselves worse than the village money lenders and mercenaries for recovery of
loans? Is it necessary that there has to be strict regulation of these MFIs? Why are the
Governments at Centre and various States watching the scene as helpless spectators? What are
the organizations and regulators like RBI, NABARD and SIDBI to do to save from the situation?

B: Literature Review:

1. Dr C Rangarajan, Chairman of the Committee on Financial Inclusion in his report

submitted in January 2008, opined that Micro Finance Institutions could play a
significant role in facilitating inclusion, as they are uniquely positioned in reaching
out to the rural poor. Many of them operate in a limited geographical area, have a
greater understanding of the issues specific to the rural poor, enjoy grater
acceptability amongst the rural poor and have flexibility in operations providing a
level of comfort to their clientele. The Committee has, therefore, recommended that
greater legitimacy, accountability and transparency will not only enable MFIs to
source adequate debt and equity funds, but also eventually enable them to take and
use savings as a low cost source for on-lending.

The Micro Financial Sector (Development and Regulation) Bill, 2007 has been
introduced in Parliament in March 2007. The Committee feels that the Bill, when
enacted, would help in promoting orderly growth of microfinance sector in India.
The Committee feels that MFIs registered under Section 25 of Companies Act, 1956
can be brought under the purview of this Bill while cooperative societies can be taken
out of the purview of the proposed Bill.

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2. In view of the high economic growth and an expanding domestic economy, micro-
credit has a good future in India. Moreover, as the institutional sector dealing in
micro-credit expands, it reduces the need of the poor to approach the informal sector
for credit. A combination of micro-lending by larger and more efficient MFIs and the
direct lending to the poor by banks could help to cover the vast majority of the
financial needs of low income groups in India. This will, however, require a
determination of the formal banking sector to promote the inclusion of the majority of
the population in the financial system of the country. Micro credit constitutes a very
small percentage of the total lending of the commercial banks (less than one percent).
There is good scope of cross subsidization by banks both through low cost wholesale
lending to the MFIs and through lending direct to the low income clients. (Eleventh
Five Year Plan, Planning Commission, January 2007)

3. In the past 60 years, Indian banking scenario has dramatically changed benefitting the
elite class through technology leverage and the mass populace below the poverty line
(BPL) through financial inclusion. Nationalisation of Banks, opening up the sector
for private banks during the last decade, thrust given on priority sector lending, export
credit, financial inclusion, Universal Banking, consolidation, takeover, core banking
mechanism through technology leverage, etc., have paved way for enlarging the
customer base and reach. Population per branch has significantly come down during
the last 60 years. (Banking in India since Independence : A Brief History by RS
Raghavan, The Indian Banker, Volume V, No.8 – August 2010).

4. Microfinance has made tremendous strides in India over the years and it has become a
household name in view of the multi-pronged benefits reaped / receivable from
microfinance services by the poor in our country. Self Help Groups (SHGs) have
become the common vehicle of development process, converging all developmental
programmes. SHG-Bank Linkage Programme launched by NABARD way back in
1992 envisaging synthesis of formal financial system and informal sector has become
a movement throughout the country. It is considered as the largest microfinance
programme in terms of outreach in the world and many other countries are keen to
replicate this model. At present, a large number of Self –Help Group Promoting
Institutions, all the banking agencies and MFIs are pursuing this programme for the
upliftment of the poor. This is also recognized as a part of priority sector lending and
normal banking business by RBI. Thus, it is synonymous with microfinance
programme of the country. This programme is also the main contributor towards the
Financial Inclusion process in the country. As on 31st March 2009, there were more
than 61 lakh saving-linked SHGs and more than 42 lakh credit-linked SHGs and thus,
about 8.6 crore poor households are covered under the programme. (Status of Micro
Finance in India – 2008-09 : NABARD publication)

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5. The SBLP of NABARD, in the past eighteen years, has become a well known tool for
bankers, developmental agencies and even for corporate houses. With a small
beginning as a Pilot Program launched by NABARD by linking 255 SHGs with
banks in 1992, the programme has reached to linking of 69.5 lakh savings-linked
SHGs and 48.5 lakh credit-linked SHGs and thus about 9.5 crore households are
covered under the program envisaging synthesis of formal financial system with
informal sector. (Status of Micro Finance in India – 2009-10 : NABARD
publication).

6. We look up to the microfinance sector with awe for its spirit. The sector is growing
steadily at about 75 percent Compounded Annual Growth Rate (CAGR) over the last
several years. For a nascent sector, this is a big achievement. The Bharat
Microfinance Report – Quick Data 2009 of Sa-Dhan (www.sa-dhan.org) reported that
MFIs, as of March 2009 had achieved client outreach of 22.6 million of which 17.9
million were active clients (had a loan outstanding on the date). The portfolio of
MFIs, the report said, had grown by 97 percent during the year 2008-09 as compared
to 72 percent in the previous year 2007-08.

‘Indian microfinance institutions have grown at a spectacular rate between 2004 and
2009, with the average portfolio size increasing 107 percent year-on-year, while
clients increased by 91 per cent. As of 2009, the industry had a client base of about
twenty million and gross loan portfolio of INR 11,734 crore’. This estimate comes
from the third annual report by Intellecap (www.intelecap.com) on the Indian
microfinance sector titled “Indian Microfinance : Coming of Age”, which draws data
from 29 MFIs, who constitute 80 per cent of the market by portfolio outstanding.

Indian MFIs, the report says, are expected to cover 110 million borrowers and INR
135,000 crore ($ 30 billion) in their loan portfolio by 2014. Growth in future, the
report added is expected to come from under-served states that are witnessing a flurry
of activity and also from a range of new financial and non-financial products that are
being introduced in the sector. (A Dipstick on Microfinance Institutions in India :
Choices and Strategies by R K Mukherjee, The Indian Banker, December, 2010).

7. In recent years, micro finance has gained recognition as an effective tool in improving
the quality of life and living standards of very poor people. This recognition has
given rise to a movement that now has a global outreach and has penetrated in the
remote rural areas, besides slums and towns.

Micro Finance programmes extend small loans to poor people for their varied needs
such as consumption, shelter, income generation and self-employement, etc. In some
cases, micro finance programmes offer a combination of several services to their
clients, in addition to credit. These include linkages with savings and insurance

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 avenues, skill development training and marketing network. Micro credit
programmes, thus, assume significance since they facilitate poverty reduction through
promotion of sustainable livelihoods and bring about women empowerment through
social and collective action at the grass-roots. In addition, micro finance
interventions lead to increased social interaction for poor women within their
households and in the community, besides, greater mobility that increases their self-
worth and self-assertion in the social circle. (Assessing Development Impact of Micro
Finance Programmes : Findings and Policy Implications from a National Study of
Indian Micro Finance Sector : SIDBI and AFC; funded under DFID, UK)

C: Microfinance: Micro finance is the provision of thrift, credit and other financial services and
products of very small amounts to the poor for enabling them to raise their income levels and
improve their living standards. It has been recognized that micro finance helps the poor people
meet their needs for small credit and other financial services. The informal and flexible services
offered to low-income borrowers for meeting their modest consumption and livelihood needs
have not only made micro finance movement grow at a rapid pace across the world, but in turn
has also impacted the lives of millions of poor positively.

The beginning of the micro finance movement in India could be traced to the self-help groups
(SHG) – Bank Linkage Programme (SBLP) started as a pilot project in 1992 by National Bank
for Agricultural and Rural Development (NABARD). This programme not only proved to be
very successful, but has also emerged as the most popular model of micro finance in India.
Other approaches like micro finance institutions (MFIs) also emerged subsequently in the
country. (Trend and Progress of Banking in India 2007-08, RBI)

D: Microfinance and Rural Lending in India

Micro-finance refers to small savings, credit and insurance services extended to socially and
economically disadvantaged segments of society. In the Indian context terms like "small and
marginal farmers", "rural artisans" and "economically weaker sections" have been used to
broadly define micro-finance customers. The recent Task Force on Micro Finance has defined it
as "provision of thrift, credit and other financial services and products of very small amounts to
the poor in rural, semi urban or urban areas, for enabling them to raise their income levels and
improve living standards". At present, a large part of micro finance activity is confined to credit
only. Women constitute a vast majority of users of micro-credit and savings services.

Due to its large size and population of around 1000 million, India's GDP ranks among the top 15
economies of the world. However, around 300 million people or about 60 million households,
are living below the poverty line. It is further estimated that of these households, only about 20
percent have access to credit from the formal sector. Additionally, the segment of the rural
6
population above the poverty line but not rich enough to be of interest to the formal financial
institutions also does not have good access to the formal financial intermediary services,
including savings services. A group of micro-finance practitioners estimated the annualized
credit usage of all poor families (rural and urban) at over Rs 45,000 crores, of which some 80
percent is met by informal sources. This figure has been extrapolated using the numbers of rural
and urban poor households and their average annual credit usage (Rs 6000 and Rs 9000 pa
respectively) assessed through various micro studies.

Credit on reasonable terms to the poor can bring about a significant reduction in poverty. It is
with this hypothesis; micro credit assumes significance in the Indian context. With about 60
million households below or just above the austerely defined poverty line and with more than 80
percent unable to access credit at reasonable rates, it is obvious that there are certain issues and
problems, which have prevented the reach of micro finance to the needy. With globalisation and
liberalisation of the economy, opportunities for the unskilled and the illiterate are not increasing
fast enough, as compared to the rest of the economy. This is leading to a lopsided growth in the
economy thus increasing the gap between the haves and have-nots. It is in this context, the
institutions involved in micro finance have a significant role to play to reduce this disparity and
lead to more equitable growth.

E: Indian Banking / Financial System:

As already indicated in the introduction, today the Indian Banking System comprises of banks
belonging to (1) State Bank Group (2) Public Sector Banks (3) IDBI (4) Old Private Sector
Banks (4) New Generation Private Banks (5) Foreign Banks (6) Regional Rural Banks (7) Local
Area Banks (8) Cooperative Banks (Urban and Rural). As many as about 70,000 branches of all
these banks are catering to developmental finance besides commercial lending with a
commitment to comply with the RBI’s Priority Sector loans. Year after year, this portfolio has
been on the increase in tune with the commercial lending and retail banking loans. In addition to
these banks and their branches in Metro, Urban, Semi-urban and Rural areas rendering credit to
the poor for carrying on their income generating activities, several Financing Companies
(generally registered Non-Banking Finance Companies and Chit Fund or Nidhi Companies) also
operate in extending credit. And then, MFIs today occupy a prominent place in bridging the gap
of credit demand from the beneficiaries of poorer strata.

F: Issues and Concerns:

The Reserve Bank of India on the 22nd December 2010, met select banks and SIDBI to get an
assessment regarding the ground level situation in the microfinance sector in Andhra Pradesh
and other states and the need for any interim measures.

Banks informed that collections by MFIs in Andhra Pradesh have deteriorated considerably and
there were some incipient signs of the contagion spreading to other states. As far as the banks’
exposures to MFIs were concerned, the MFIs had been able to meet their repayment obligations
to the banks till November 2010. However, going forward this may be a matter of concern. The
7
general view of the banks was that while the structural issues regarding the MFI sector may be
addressed by the Malegam Committee, some interim measures may be required to address the
gap between the recoveries by MFIs and their payment commitments to banks. The banks
stressed on the need to work out an interim arrangement involving, inter alia, rescheduling of
exposures to MFIs subject to certain covenants such as MFIs agreeing to reduce their leverage
and growth projections. Bankers requested Reserve Bank to consider some regulatory
concessions to enable them to reschedule the exposure to MFIs.

The RBI sensitized the banks to the need to maintain funding lines to MFIs on merits to prevent
contagion. The Indian Banks Association will shortly come up with concrete proposals for the
measures to be taken in the interim, for consideration of Reserve Bank of India.
(www.rbi.org.in)

The primary issues of concern with regard to MFIs as players in Indian Banking system for
financing rural and urban poor are:

(1) Introduction of standardized guidelines for MFIs with regard to application, appraisal,
selection of borrowers, security, margin requirements, documentation, etc., as also avoiding
multiple financing to a single borrower by different agencies;

(2) Charging of high rates of interest on the loans (generally said to be around 30% p.a. plus),

(3) Mercenary Recovery mechanisms adopted by engaging outsiders/ collection agents,

(4) Need to imparting and introducing of technology in MFI operations for a sound MIS system,

(5) Compulsory credit rating of MFIs who are for-profit type, by agencies like CRISIL, M-Cril,
etc., particularly when they borrow funds from banking system and resort to public issues;

(6) MFIs to extend all financial and non-financial supports in accomplishing the Millinneum
Development Goals like the formal banking system and

(7) MFIs to be registered with NABARD with a laid down reporting system while ensuring
proper compliances to RBI as also NPA management, etc.

(8) Internal Audit and Risk Management mechanisms to be introduced for MFIs

(9) Immediate need for enactment of a law covering all types of MFIs in the country and fixing
up the regulatory mechanism.

G: Conclusion and Recommendations: The banking system in India is well oiled to deliver
credit to the rural poor and women for over fifty years under the supervision and monitoring
mechanism of Reserve Bank of India. MFIs being only alternative players in the funding or
lending activities, their cost of operations would be higher. Generally, Microfinancing is
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expected to be non-profit oriented developmental activity. However, once they are being
permitted to operate as a commercial proposition, several issues propped up. Hence, there is an
urgent need for enactment of a central law instead of individual states (like AP) passing separate
laws. Such an enactment should cover all the aspects pertaining to formation, working and
monitoring of MFIs by the regulator in the larger interest of the poor, gullible and innocent
borrowing community. In brief, professionalism has to be brought in to ensure smooth
functioning of MFIs of all types in the system. RBI, NABARD and SIDBI should take up large
scale Financial Literacy about MFIs in rural and semi-urban areas. An Ombudsman should be
introduced to resolve all types of grievances and quick disposal. All the staff members and
agents operating in this system should be imparted necessary training intensively on all aspects.

References:-

A. Books

01. Banker to the Poor – The History of the Grameen Bank (the autobiography) by
Muhammad Yunus, founder of the Grameen Bank, with Alan Jolis, Penguin Books, 1998-99.

02. Building Social Business – The New Kind of Capitalism that Serves Humanity’s Most
Pressing Needs by Muhammad Yunus, with Karl Weber, BBS Public Affairs, New York, 2010

03. Micro-finance : Perspectives and Operations – Indian Institute of Banking & Finance,
Mumbai – Macmillan, 2009

04. Indian Microfinance : The Challenges of Rapid Growth by Prabhu Ghate, Sage
Publications, 2007

05. Microfinance : An Introduction : Edited by Vijaya Agarwal and VRP Kashyap : ICFAI
Books – The ICFAI University Press, Hyderabad, 2005

06. Practical Micro Finance : A Training Guide for South Asia by Malcolm Harper, Vistaar
Publications, New Delhi, 2003

07. Microfinance Handbook : Sustainable Banking with the Poor : An Institutional and
Financial Perspective by Joanna Ledgerwood, The World Bank, Washington, D.C. , USA,
December 1998

08. HR Management for MFI Toolkit developed by Kim Pityn and Jennifer Helmuth, Adapted
by Graham A.N. Wright and Madhurantika Moulick (MicroSave)

09. Overview of Financial Inclusion and Micro Credit: D.T. Pai, former Chairman &
Managing Director, Syndicate Bank, Manipal : 2010

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10. India and the Global Financial Crisis, Managing Money and Finance : Dr Y.V. Reddy,
former Governor, Reserve Bank of India, Mumbai – Orient Blackswan Private Ltd., New Delhi,
2009

11. Microfinance in India – Edited by K.G. Karmakar : SAGE Publications, 2008

12. Towards a sustainable Microfinance Outreach in India: Experiences and Perspectives

(298 pages) : published by Micro Credits Innovation Department NABARD-Mumbai, German
Technical Cooperation-Rural Finance Program-New Delhi and Swiss Agency for Development
and Cooperation-New Delhi, May 2006

13. Microfinance in India – A State of the Sector Report, 2007 (196 pages) : Prabhu Ghate,
Lead Author and five others for access Development Services, Ford Foundation and Swiss
Agency for Development and Cooperation, New Delhi (SDC).

14. ICICI Bank Foundation Annual Report (84 pages) for 2009-10

15. Readings on Financial Inclusion published by Indian Institute of Banking and Finance,
Mumbai, and Taxmann Publications (P) Ltd, 2006

B. Journals and Magazines

01. A Dipstick on Microfinance Institutions in India – Choices and Strategies : by R K

Mukherjee in The Indian Banker (monthly), Volume V No.12, December 2010

02. IIBF Vision (monthly Newsletter of Indian Institute of Banking & Finance, Mumbai)
– various issues

03. The Microbanking Bulletin, Issue No. 20 (September 2010) published by

Microfinance Information Exchange (mix)

04. Financial Literacy and Credit Counselling Centres (FLCCs), Financial Inclusion
and NABARD-UNDP Collaboration for Financial Inclusion in the Trend and Progress
of Banking in India – RBI (annual), November 2010

05. Quarterly Newsletter of ICICI Foundation for Inclusive Growth: Issue 1, June
2010

06. HARA-KIRI : Is the microfinance industry in India committing suicide? :

Business India (fortnightly) : November 14, 2010

07. Micro Matters – A Journal for Micro Finance : Issue 1, June 2010 : A Sa-Dhan
Initiative

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 08. Microfinance World – An insight in to the world of Microfinance:
Complimentary with the Financial Express – April-May-June, 2010 (issued by
NABARD)

09. Draft Red Herring Prospects dated March 25, 2010 of SKS Microfinance Ltd.

10. Microfinance activities and the Core Principles for Effective Banking
Supervision – August 2010 – Bank for International Settlements – 64 pages.

11. India Top 50 Micro Finance Institutions: October 2009 : CRISIL Ratings (68
pages)

12. Moving Mountains: Man of the Year Cover Story : Subhash Mendhapurkar has
transformed the lives of women in the Shimla Hills. Even the Sex Ratio has become
healthy by Kallol Bhattacharjee, in The Week magazine, December 21, 2008

C: Papers:

1. SmartAid for Microfinance Index 2011 : Submission Guide : Alexia Latortue, Mayada
El-Zoghbi, Barbara Gahwiler, Consultative Group to Assist the Poor (CGAP), The World
Bank, Washington, USA : 2010

2. Assessing Development Impact of Micro Finance Programmes : Findings and Policy

Implications from a National Study of Indian Micro Finance Sector : SIDBI : Study
commissioned by SIDBI and funded under collaboration with DFID, UK

3. Status of Micro Finance in India 2009-10 by NABARD

4. Status of Micro Finance in India 2008-09 by NABARD (198 pages)

5. Micro Finance in Macro Problems by Dr B Yerram Raju, Hyderabad

6. Financial Inclusion in India – Yet another Ritual or An Integrated Tool for Poverty
Alleviation? By Prof Chowdari Prasad and Dr B Yerram Raju, presented at the
International Conference on ‘Better Business Practices for Sustainable Social Change’
organized jointly by Justice K S Hegde Institute of Management-Nitte and School of
Social Policy and Practice, University of Pennsylvania-USA on 29-30th December, 2008.

7. Power Point Presentation from Internet titled “Management Education in

Microfinance” by K. Sukumaran, Indian School of Microfinance for Women,
Ahmedabad, India

8. Microfinance Auditing – Internal Audit from the Internet :

www.indiamicrofinance.com
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9. Micro Finance in India from Internet : www.basixindia.com;

10. Micro Finance in India and Millennium Development Goals : Maximising Impact
on Poverty by Alok Misra – Discussion Paper for Workshop on World Bank, Singapore
on the 18th September, 2006 (Draft Paper)

11. Rural Credit in 20th Century India – An Overview of History and Perspectives by
Mihir Shah, Rangu Rao and P.S. Vijay Shankar

12. Microfinance as Business by David Roodman and Uzma Qureshi, Working Paper
Number 101, October 2006 : Center for Global Development, funded by ABN-AMRO

13. Self-Help Groups: A Keystone of Microfinance in India – Women empowerment &

Social Security by CS Reddy APMAS CEO, and Sandeep Manak, APMAS Intern, Oct
2005

14. Microfinance in India : Discussion : Round Table Discussion by R Srinivasan (IIM-B)

and M.S. Sriram (IIM-A), IIMB Management Review, June 2003

15. Inclusive Growth : Role of Financial Sector by Dr K C Chakrabarty, Deputy Governor

of Reserve Bank of India : RBI Monthly Bulletin, December 2010

16. Monthly Economic Report, October 2010 issued by Ministry of Finance, Department
of Economic Affairs, Economic Division, Government of India

17. Financial Inclusion – An Illusion? By Dr B Yerram Raju, Hyderabad

18. Micro-Finance in the new economy – India’s Experience by R Krishnamurthy, CGM-

NABARD-RO-Pune, India and Makarand Ratnaparkhi, Department of Mathematics and
Statistics, Wright State University, Dayton, USA, 2002

19. Microfinance Deal to Benefit 30,000 Poor in India : Grameen Foundation-USA

plays Catalytic Rold to Bring Capital to the industry by Fiona McDowell Foundation,
USA

20. The Economics of Microfinance : Second Edition by Beatriz Armend’ariz and Jonathan
Morduch – 2010 : The MIT Press, Cambridge, Massachusetts, London, England

21. Concept Paper : Microfinance Institutions in India by Piyush Tiwari and S.M. Fahad,
Housing Development Finance Corporation, Mumbai

22. Conference on Micro Finance in India : “Micro-Finance : The Road Ahead”

Inaugural address by Dr C Rangarajan, Chairman, Economic Advisory Council to the
Prime Minister : April 2005, New Delhi

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 23. Microfinance and Financial Inclusion of Women : 2009 : An Evaluation : RBI
Occasional Paper : Volume 30 No.2 : Pallavi Chavan and Bhaskar Birajdar

24. Empowering Women in an insecure world : Joining SEWA makes a difference :

SEWA Academy, Ahmedabad Report (53 pages) – Renana Jhabwala, Sapna Desai,
Jignasa Dave

25. Banking in India since Independence : A Brief History by R.S. Raghavan : The Indian
Banker (monthly published by the Indian Banks’ Association, Mumbai) : August 2010

26. Report of the Expert Group on Agricultural Indebtedness – Ministry of Finance,

Government of India : July 2007 by Dr R Radhakrishna, Indira Gandhi Institute for
Development Research (IGIDR), Mumbai.

27. Institute for Financial Management and Research, Centre for Micro Finance :
Working Paper – September 2007 by Karuna Krishnaswamy, on Competition and
Multiple Borrowing in the Indian Micro Finance Sector

28. Report of The Working Group on Competitive Micro-Credit Market in India : The
Eleventh Five Year Plan (2007-08 - 2011-12) : Development Policy Division,
Planning Commission, New Delhi, January 2007

D: News Paper Articles:

1. Microfinance Companies may retrench staff to cut costs : Over one lakh rural youth
employed as field staff face uncertainty by G Naga Sridhar : The Hindu Business Line,
Wednesday, January 05, 2011

2. MFIs need to rethink operational strategies : 2010 saw the rise and fall of
microfinance institutions : Sectoral Outlook : G. Naga Sridhar & M. Somasekhar,
Business Line, January 01, 2011

3. Microfinance, Macro Trends : Focus on the individual is taking away focus from work
that requires collective action : Rohini Nilekani : The Times of India, Bangalore :
Saturday, December 25, 2010

4. Look at financial inclusion as a business opportunity : Subbarao – Banks will access

to low-cost, stable funds : Business Line, December 07, 2010

5. MFI Crisis in Perspective by K. Kanagasabapathy in Business Line : November 26,

2010

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 6. Microfinance under Severe Stress : The Accusation of ‘coercive’ practices to recover
the loans has been laid at the doors of some leading players : by CRL Narasimhan, The
Hindu, Monday the November 01, 2010

7. Microfinance, Macro Effects by Vishal Mehta, Indian express columnist, December 03,
2010 (from the Internet : www.indianexpress.com/news/microfinance-macro-
effects/719744/0)

8. Top 50 Microfinance Institutions in India : CRISIL releases publication : Press

Release by CRISIL Ratings : October 08, 2009, Mumbai

9. Permit MFIs higher interest rates : If the Government wants to help the poor, rather
than worry about curbing the interest rates of the MFIs, it should re-examine whether
they should be permitted a corporate structure – V Raghunathan, The Economic Times,
dated Saturday October 30, 2010.

E: Websites:

1. www.sidbi.com

2. www.rbi.org.in

3. www.nabard.org

4. www.microfinancefocus.com

5. www.crisil.com

6. www.accessdev.org

7. www.microfinanceindia.org

8. www.livelihoods-india.org

9. www.ibef.org

10. www.iibf.org.in

11. www.cgap.org

12. www.indiamicrofinance.com

13. www.basixindia.com

14. www.cgdev.org

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15. www.apmas.org

16. www.icicifoundation.org

17. www.ficci.org

18. www.icrier.org

19. www.sa-dhan.net

20. www.gtz.de

21. www.pragathinet.org

22. www.youtube.com

23. www.ficci.org

24. www.m-cril.com

25. www.indiastat.com

26. www.centerforfinancialinclusion.org;

27. www.ifmr.ac.in

28. www.fordfound.org

29. www.sdcindia.in

30. www.villagebanking.com

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 Annexure – I The Pilgrim’s Progress (Source: Business India, Nov 14, 2010)

1720 : Jonathan Swift starts world’s first microfinance institution (MFI) – the first Loan Fund

1974 : Shri Mahila SEWA Sahkari Bank set up as an urban co-operative bank. This is
considered India’s first MFI

1996 : The Reserve Bank of India (RBI) includes microfinance under bank priority sector
lending

1997 : SKS begins life as SKS Society, a non-profit organization

2005 : SKS becomes a for-profit organization

2006 : Indian MFIs begin attracting VC and PE investments

2007 : Micro Financial Sector (Development & Regulation) Bill tabled in Lok Sabha. Bill lapses
with the expiry of 14th Lok Sabha

2009 : January – Suicides in Kolar district of Karnataka, allegedly due to coercion by MFI
recovery agents. Borrowers stop payment

Nov – RBI constitutes working group on MFIs. Recommendation that MFIs no longer be
considered priority sector lending

Dec – Microfinance Institutions Network (MFIN), a self-regulatory organization, formed

2010:

28 July: SKS Microfinance becomes first MFI in India to go public. Shares listed at Rs. 1,040
against issue price of Rs. 985

28 Sept: SKS shares at an all-time high of Rs. 1,490

Sept: Suicides in Andhra Pradesh. Harassment by MFI recovery agents alleged

04 Oct : SKS CEO Suresh Gurumani is sacked.

14 Oct : Andhra government passes ordinance regulating MFIs. Complex registration

procedures halt all MFI activities.

19 Oct : RBI sets up a Panel headed by Y.H. Malegam to study issues and concerns of the
microfinance sector

22 Oct : Court allows MFIs to resume operations in A.P

26 Oct: Finance Minister Pranab Mukherjee rules out any move to regulate MFIs

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27 Oct : MFIs in Andhra agree to reduce interest rates by 2 per cent as well as offer the option of
restricting loans

28 Oct : AP government sets up four committees for effective implementation of its MFI
Ordinance.

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Annexure - II

Extracts from IIBF Vision (monthly) published by Indian Institute of Banking & Finance

Volume No. 3 Issue No. 05 December 2010

Scrapped MFIs seek Rs. 1,000 crore: Cash-strapped microfinance firms have sought
emergency funds worth Rs. 1,000 crores from banks. This corroborates that, the beleaguered
industry’s options of tiding over an acute liquidity crisis caused by the Andhra Pradesh
government’s move to regulate the industry, are fast running out. The funds will be used to tide
over liquidity crisis for any MFI, to obviate default, as well as to permit token disbursements in
outside Andhra Pradesh so that recoveries continue there.

Banks agree to resume MFI lending, but counsel caution: Banks have agreed to normalize
lending to MFIs but have asked them to be extremely cautious to prevent slippages. MFIs raise
75-80% of their funds via blank borrowings, 15% from equity and 10% from other sources like
cash securities. Banks had become reluctant to lend to MFIs especially those that had a large
exposure in Andhra Pradesh and held weekly collection of dues.

No takers now for securitized microfin loans: Investors are shying away from securitized
loans of MFIs, as the ordinance issued by the Andhra government has slowed recoveries,
creating uncertainty around the underlying portfolio. 1/3 rd of the country’s micro-finance
lending happens in AP. Securitisation is the process through which MFIs pool the receivables
from loans given to their customers and mutual funds. Unlike the traditional loan portfolio sale
or assignment, in this process the MFI portfolio is rated and converted into standardized
securities, which can be traded more easily.

Volume No.3 Issue No. 04 November 2010

SHARE Microfin in talks with Asmitha for merger: Hyderabad based MFIs, SHARE
Microfin Ltd., and Asmitha Microfin Ltd., are in talks for a possible merger prior to the former’s
public issue. The mergeris aimed at boosting valuations and will make the combined entity the
third largest player in the MFI space.

MFIs experiencing difficulty in flow of funds from banks: In a fresh blow to micro-finance
institutions (MFIs), banks are refusing to lend them even a sanctioned line of credit, following
recent controversies over opaque corporate governance and usurious interest rates. The ensuing
liquidity crisis has prompted many MFIs to seek a moratorium on loan repayment to banks.

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MFIN, or Microfinance Institutions Network, will discuss the moratorium at a meeting soon and
take up the matter with a newly revived forum of MFI lenders, led by SIDBI, which in turn is
expected to take up the matter with the Indian Banks Association (IBA).

SIDBI lines up Rs. 350 crore for Bandhan: Small Industries Development bank of India
(SIDBI) has extended a Rs. 350 crore line of credit to Bandhan Financial Services to on-lend to
poor women. Bandhan will be using the fund to lend to 3.5 lakh new borrowers this fiscal.
SIDBI has also committed to further offer Rs. 50 crore to Bandhan as a subscription to the
latter’s proposed non-convertible debentures (NCD).

Malegam to head RBI Panel on MFIs: The RBI’s Committee on MFIs will be examining
issues of high interest rate, coercive recovery process and multiple lending practices by some
MFIs. The panel will examine the ordinance in Andhra Pradesh, making it compulsory for MFIs
to register with State Governements. The Committee, headed by Shri Y.H. Malegam, a senior
member on RBI’s Board of Directors, will give its report in three months.

The RBI regulates only those MFIs registered with it as NBFCs. While they form a small
number of MFIs, these account for 80% of the microfinance business. RBI said that the
Committee would study the implications for its policies and the role played by MFIs in providing
access to financial services to the poor and excluded. It will study the issues and concerns in this
sector, including ways and means of making interest rates charged by them reasonable. Finance
Minister Mr. Pranab Mukherjee has said that micro lenders must develop a code of conduct on
interest rates and prohibit coercive recovery methods.

Volume No. 03 Issue No. 03 October 2010

Microfin Cos likely to lose access to cheap funds from banks: A RBI Committee headed by
Mr. V.K. Sharma, Executive Director, has recommended that the priority sector status, which is
accorded now to banks’ exposure to Non-Banking Finance Companies (NBFCs) shoud be
withdrawn. However, to ensure a non-disruptive and orderly phase-out or exit, the group has
recommended a sunset period up to March 31, 2012. Though state-run banks in the country also
have a direct exposure to micro finance through their rural branches, most private and foreign
banks use this facility to fulfil their priority sector lending targets.

However, sensing an opportunity to boost profits in this form of lending, many foreign banks
have been very aggressive in their lending to MFIs. The competition that followed among
bankers to lend to select few profitable and professional MFIs has helped some of these
institutions to raise funds at competitive rates besides bargaining power. However, if the priority
sector tag were to be withdrawn, banks may not remainas enthusiastic in chasing MFIs for
business.

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Volume No. 3 Issue No. 02 September, 2010

Microfinance

Quantitative Performance of Self Help Group Bank Linkage Program (SBLP)

(Amount in Rs. Crores)

Parameter 2006-07 2007-08 2008-09

Savings of No. of SHGs 4160584 5009794 6121147

SHGs
(20.4%) ((22.2%)

Amount 3512.71 3785.39 5545.62

(7.8%) (46.5%)

Bank Loan No. of SHGs 1105749 1227770 1609586

Disbursement
(11%) (31.1%)

Amount 6570.69 8849.26 12253.51

(34.7%) (38.5%)

Bank Loan No. of SHGs 2894505 3625941 4224338

Outstanding
(25.3%) (16.5%)

Amount 12366.49 166999.91 22679.84

(37.5%) (33.4%)

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